Sell Block: Rebounding Banks

Bank of New York and State Street could move much higher if only the government would loosen its grip on the banking industry. Cramer thinks that might happen sooner rather than later, so investors should keep an eye on these two stocks. They look ready to escape the Sell Block.

Few others expect the change of heart, but Cramer sees signs that Washington will ease up on mark-to-market accounting rules and let banks work out their troubled assets over time. Right now the feds are pressuring these firms to take losses on their books that would directly hit their capital base. Banks without capital, of course, are virtually doomed to failure. So this shift would give them a chance to get back on their feet.

Bank of New York and State Street are different than, say, Bank of America and JPMorgan Chase, which are large, diversified banks, or Morgan Stanley and Goldman Sachs, which are brokerages. BK and STT are bank trusts, or banks for bankers. These two service and manage the assets of other financial firms, and Cramer said it’s a great business to be in.

BK is the largest, with $20.2 trillion in assets under custody and $927 billion under management. The company services more than $11 trillion in debt and processes $1.8 trillion in global payments daily. In 2008, while most of the market was reeling, Bank of New York actually took share, capturing $1.9 trillion in new business. It’s the sole provider of a range of custodial and corporate trust services in support of the Troubled Assets Relief Program and clears over 50% of U.S. government transactions. So you can see why Cramer’s bullish on BK.

State Street’s number three among the bank trusts. It holds $12 trillion in assets and manages $1.4 trillion. STT services institutional investors, dealing mainly in mutual funds and pensions, and gets paid to hold that money. These servicing fees, Cramer said, are consistent, low-risk revenue streams. He doubts the company will remain independent long given the business’ profitability. That is, as long as Washington lets up on mark-to-market.

Both stocks have dropped after a Goldman Sachs downgrade. But the firm did so on the assumption that accounting rules will stay the same. Cramer disagreed, saying BK and STT might benefit so much as to see some of their losses reversed. He expects the stocks to run if the government backs off.

That doesn’t mean you run out and buy right away. On Friday, President Obama will meet with bank CEOs to talk about TARP, and the exchange might be less than cordial. The White House might refuse to accept repayment of any bailout money, and that would hurt this sector’s stocks. Only for the short-term, though, Cramer said. So just wait until Monday when the dust has settled before you start to build a position. A little bit of patience will offer the chance at a much better price.

Cramer's charitable trust owns Goldman Sachs, JPMorgan Chase and Morgan Stanley.

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