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If Government Buys Banks, Should You?

Monday, 13 Oct 2008 | 6:12 PM ET

Excitement is building among traders in anticipation of new details on a financial market stability plan being released as soon as Tuesday. The White House summoned bank executive from leading financial firms to Washington to sort out the details.

According to CNBC’s Steve Liesman, “Guests included John Mack from Morgan Stanley (MS),Goldman Sachs (GS) CEO Lloyd Blankfein, Merrill Lynch's (MER) John Thain as well as JPMorgan (JPM) CEO Jamie Dimon and Vikram Pandit from Citigroup (C).”

Trade Tomorrow: Banks
Governments are buying banks, so should you? The Fast Money traders, and David Trone, of Fox-Pitt Cochran Caronia Waller, share their insight.

Sources tell CNBC that the plan could be announced as soon as Tuesday and it will go further than either agency has gone so far in its efforts to stop the financial crisis from spreading.

There’s talk about guaranteeing inter-bank lending, broader deposit insurance and capital infusion into banks, which would essentially nationalize banks, at least partially.

I expect the government to come in and match what the Europeans have done, Liesman says. A major reason that Treasury must move on the guarantees: if it doesn't there will be guarantees in Europe that will not exist in the U.S. That could mean money will flow towards countries with the best guarantees.

Meanwhile, there’s also talk of another stimulus package.

With officials suggesting that the government will likely buy bank stocks soon, should you beat them to the punch?

Investors such as Jeff Macke are concerned about dilution. If the US government goes into the business of buying preferred shares then I'm not sure how to go forward. The solution is somewhat socialist, he says.

“I expect the injection will result in lower earnings,” adds Fox-Pitt analyst David Trone. “We think dilution will be 10% or 15%.”

Not huge but nothing to sneeze at either. As you might guess both Macke and Trone are cautious. Both recommend allowing the plan to go to work for a while before rushing in as a buyer.




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Trader disclosure: On Oct.13, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Macke Owns (C), (WMT), (MCD), (BNI), (MSFT); Adami Owns (AGU), (C), (BTU), (GS), (INTC), (MSFT), (NUE); Finerman Owns (GS); Finerman's Firm Owns (DELL), (MSFT); Finerman's Firm Owns (MS) Calls; Finerman's Firm Is Short (USO), (IJR), (MDY), (SPY), (IWM), (USO), (BBT), t (COF); Seymour Owns (AAPL), (F), (GE), (MER); Seygem Asset Management Owns (EEM); GE Is The Parent Company Of CNBC; NBC Universal Is The Parent Company Of CNBC; Finerman's firm owns (MRK); Seygem Asset Management Owns (MER)

FPK Or Affiliates May Seek Investment Banking Compensation From (C) In Next 3 Months; FPK Or Affiliates May Seek Investment Banking Compensation From (JPM) In Next 3 Months; FPK Or Affiliates May Seek Investment Banking Compensation From (GS) In Next 3 Months; FPK Or Affiliates May Seek Investment Banking Compensation From (MS) In Next 3 Months; FPK Or Affiliates May Seek Investment Banking Compensation From (WFC) In Next 3 Months

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JPM MLP ETN
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