Fallout: The Financial Crisis

Bailed-out firms not your best stock bet

Amy Scott Aug 27, 2009
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Fallout: The Financial Crisis

Bailed-out firms not your best stock bet

Amy Scott Aug 27, 2009
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TEXT OF STORY

Tess Vigeland: You gotta wonder what’s going on when companies that have been bailed out by the federal government are some of the hottest stocks around. In the last few weeks, AIG, Fannie Mae, Freddie Mac all have bounced big time. Of course, we the taxpayers are big investors in all three. Marketplace’s Amy Scott looked into when we might get to cash out.


AMY SCOTT: There are a few reasons investors might be buying Fannie, Freddie and AIG. The housing market has stabilized somewhat. AIG recently reported better than expected profits.

But here’s a reason not to buy: In all three cases, the federal government is a senior preferred shareholder. So if you’re a common stockholder, you have to wait in line for a share of any profits.

ROD SMYTH: You would be looking at a very long time before you actually got a return on your money, because the government must be paid back first.

That’s Rod Smyth with Riverfront Investment Group. He says investors may be thinking they have a better chance of making money.

SMYTH: If the stocks were priced that there was almost no chance, and now there’s a little bit of a chance, then the stock should be higher.

Just for some perspective, AIG traded at nearly $1,500 a share a few years ago. Now it’s around 50.

Tom Mitchell follows financial stocks at Miller Tabak. He says eventually a higher stock price would help AIG raise capital. And that would help the company pay taxpayers back. But he says it’s not there yet.

TOM MITCHELL: AIG’s stock price has to go up by 10 or 20 times to really make a difference. That’s in our opinion. It needs to go up a lot more before the potential for raising new capital becomes significant enough that it would really effect the government’s position or its options.

Mitchell says a lot of the people buying AIG or Fannie Mae don’t necessarily believe in their long-term future. They’re speculators cashing in on short-term swings in prices.

In New York, I’m Amy Scott for Marketplace.

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