http://www.thestreet.com/...

Steve

• 1/14/2009: 404 shares (~10% of the portfolio) @ $23.41
• 1/20/2009: 225 shares (bring investment back up to ~10%) @ 16.63

Position: 629 shares @ an average cost of $20.98 including $9.99 trading commissions on each purchase.

I’ll post my rationale on buying later today or tomorrow.

You’d have to consider the dilution if any is needed in the future. In fact, I think Warren Buffet has also taken a stake in GE with favorable terms (for him of course! lol)

http://woodrow.typepad.co...

here’s a quote, (just ignore the “noise”)

“”Berkshire will invest $3B in exchange for perpetual preferred stock that pays a 10% annual dividend

Berkshire will receive rights to purchase an additional $3B in common stock at $22.25 per share, exercisable for the next 5 years

GE will raise an additional $12B in common stock through a spot secondary [pricing tonight]

GE can call in the preferred stock at any time over the next three years for a 10% premium”"

“”10% perpetual preferred plus warrants = hardly the same as going out and buying common shares in the open market. Buffett is no altruist, he and his investors expect him to act aggressively when opportunity arises. He’s getting extremely attractive terms because GE and Goldman Sachs feel those terms are warranted; and there’s the rub. GE is an American institution and carries a AAA credit rating. The fact a AAA-rated firm of GE’s caliber would feel compelled to offer a senior perpetual preferred to any investor, even Warren Buffett, is a testament to just how tight liquidity remains throughout the system. To take a page out of my friend Roger’s book…companies are paying a premium for option liquidity. “”

“”So is Buffett signaling a market bottom? Impossible to say. Buffett doesn’t need the equity markets to rally for his investments to pay off. He just needs GE and Goldman Sachs to stay solvent and pay him 10% dividends year in, year out. “

I think that you’re right about Wells Fargo from an eventual valuation standpoint. I think they’ve firmly entrenched themselves as one of the big money center banks in this country. They’ve always been operationally well run and focused more on the banking business and none to very little on the securities trading business. Because of this focus in this time of turmoil they are less exposed then the other more fleshed out (proprietary traders) financial supermarket banks like JPMorgan, Citi, and B of A. Ultimately, I believe that recent events may have even strengthened Wells Fargo’s competitive advantage thus ultimately resulting in a higher potential valuation then previously existed.

However, my biggest concern would be who’s going to own the equity of the bank and benefit from the resulting value appreciation. I think the very large banks like Wells Fargo are too big to fail. Because of this, the result will be that the U.S. government will put up any money needed to prevent one of the big 5 or 6 (if you include Goldman and Morgan Stanley) from going down.

There is a 200 basis point difference in borrowing cost (outside of the TLGP issues) between the big banks and the GSEs like Fannie and Freddie. Because of this my feeling is that if one big bank must be saved (nationalized) then they all will be required to take on some form of nationalization just to remain competitive. If a large bank were nationalized my assumption is that its borrowing costs would be equal to the GSEs. In a nationalization, my feeling is that the equity holders would be wiped out while the bond holders would be left whole though probably subordinated to a government senior secured loan. If every very large bank was required to at least partially nationalize to eliminate the competitive imbalance between nationalized and un-nationalized banks this would substantially dilute the current shareholders. This dilution would be the payment for the government guarantee. Yes, Wells is strong, but some of it’s compatriots are weak. It’s similar to being the strongest auto parts manufacturer.

My analysis, or lack of, leads me to some questions for you: a) what’s your estimate of expected dilution (that’s probability weighted) and how does it affect your per share valuation? b) if the bondholders stay whole I would expect a very nice return with very limited downside risk, why not buy the bonds? c) I think there’s value in banks, why buy one of the big ones instead of hunting for a smaller very-well capitalized bank like a sub-regional where it’s likely the risk/reward is much better due to narrower business lines, stickier deposits, personal relationships, and strong loan underwriting? Both Wilbur Ross and Christopher Flowers have or are looking to acquire bank charters in order to start rolling up distressed banks. If these two astute investors think there is value in small banks, I’d say that there are probably industry players already in control of banks who feel the same way. I’d love to be the industry players partners.

As an aside, I assume the bondholders will remain whole because the government can’t afford to scare anybody off who’s willing to help them keep the big banks afloat. They’ve seen what can happen when they’ve handled it incorrectly three times now (Lehman, Wachovia, WaMu). The toll for keeping the bondholders whole will be subordination, but for the very big banks that’s not likely important for valation purposes. In smaller banks, it would be more important I think.

Madhawk, I’m going to investigate that book, thanks for the recommendation.

I found the video of the interview here:

http://www.pbs.org/nbr/si...

Here’s another link to an article on the downfall of Bill Miller that she posted at her website: http://finance.yahoo.com/...%27Broken-Strategy%27:-The-Fall-of-Legendary-Investor-Bill-Miller

Catherine Austin Fitts is a financial whiz, graduate of Wharton, former financial adviser to FHA, and a former Assistant Secretary of HUD

And here’s part of a note from Catherine to here e-mail list that prefaced these links:

“It is difficult for me to express how upset I am with investors being

misled by traditional portfolio strategy. Let me state for the record:

there is no such thing as a diversified portfolio when most stocks and

bonds represent companies or municipalities that are dependent on

federal government funds. In addition, there is a difference between a

traditional business cycle and a financial coup d’etat.

“Finally, if the rule of law is not available to ensure functioning

markets, all bets are off. There are some things that even zero

percent interest rates and an infinite amount of loans from the Fed

and the Treasury can’t solve.”

All the best.