How Wall Street is duping us (and how to play along)

Banks exit government bailout in time for bonus season; curious stock price slump comes as bankers prepare to receive shares as compensation

By Anthony Mirhaydari Dec 14, 2009 4:10PM

MirhaydariBanking giants like Goldman Sachs (GS), Citigroup (C), and Bank of America (BAC) are exiting the government's $700 billion financial bailout program and repaying their obligations to taxpayers. Is this being done out of a sense of patriotic duty? Or perhaps the timing coincides with a clear improvement in business? Or maybe these moves are in the best interest of shareholders?


Call me cynical, but the motivation seems clear. With end-of-year bonus season fast approaching, the Wall Street banks don't want Uncle Sam messing with their fat paychecks. They also don't want to be labeled a "bad bank" by keeping the bailout money for fear of losing market position. This is part of the reason Bank of America has had trouble finding a new CEO. Expect those that have yet to repay, such as Wells Fargo (WFC), to quickly follow suit.


On 60 Minutes Sunday night, President Obama cut down the "fat cat bankers" and said he would have a "serious talk" with them concerning reform of the regulatory system. Sure, the Wall Street types didn't mind government handholding when they stared into the abyss last fall. But with the capital markets functioning again and stocks buoyant, the bankers want to get back to what they do best: Making lots of money without explaining themselves to populist politicians or an enraged electorate.




Shareholders aren't faring much better. Fear of share dilution as the banks sell new shares to pay off the government has weighed on the sector. Citigroup is selling $17 billion in common stock. Bank of America is selling $19 billion. JP Morgan (JPM) sold $5 billion back in June.


This has contributed to dismal performance of the financial sector. Bank stocks, as represented by the Financial Sector SPDR (XLF), have gone nowhere since August 10. In comparison, the Dow Industrials have gained 12%. Heavy equipment maker Caterpillar (CAT) is up 23%.


This has been more than odd considering everyone in banking has described the current situation as one of the most profitable of all time as the credit market roars back to life, government debt issuance skyrockets, M&A activity picks up, and equity markets soar. It's clear that the banks have allowed their shares to slump as they prepare to be paid in stock instead of cash. If you had the ability to drive down the shares of stock that you were about to receive, wouldn't you do it? It's pure evil genius.




Once those bonuses have been paid and the prices recorded, you can bet that the prices of these shares will start to levitate, as if by magic. My guess is that this will happen at the start of the New Year, or late in December.


I've already started building a position in Goldman Sachs for my portfolio at Wall Street Survivor. There seems to be some support at $160 -- a level that provided support in 2007 and 2008. Also, shares look oversold on the daily and weekly charts with the stochastic indicator at levels that have been associated with price troughs. Stay tuned for trading updates.


Disclosure: The author does not own or control a position in any of the funds or companies mentioned.


Anthony Mirhaydari is a researcher for the Strategic Advantage investment newsletter. He can be contacted at Feel free to comment below.

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