article

05.04.09

Our Crashing Portfolio

The Treasury has invested billions in troubled companies—but how's our money actually doing? Duff McDonald compared our taxpayer portfolio with the S&P 500—and discovered just how bad an investment junk companies can be.

Uncle Sam, you’re fired. Not as a patriotic symbol, of course. But you’re a pretty poor portfolio manager, based on a Daily Beast stress test of the largest taxpayer investments in private industry over the past six months.

When Treasury Secretary Hank Paulson got Uncle Sam into the mutual-fund business by investing taxpayer money in the country's biggest banks with last year’s TARP bailouts, there might have been cause for optimism. The guy ran Goldman Sachs, after all. He knew a cheap stock when he saw one, right? Throw some auto-industry exposure into the mix, and we the people might have thought we were sitting on the kind of balanced portfolio that Suze Orman always touts. We were not. And both Paulson and his successor Tim Geithner have shown that they most certainly do not have the Midas Touch when it comes to investment returns.

Our worst investment was Citigroup. We’ve lost 77.7 percent on our $25 billion October investment in that goat. Why again does CEO Vikram Pandit still have a job?

In fairness, it's not like these guys were tasked with being the best money managers they could be. Instead, they were tasked with saving the system. Sadly, though, it looks like the judgment of the market is that some of the companies they thought worthy our largesse were destined for the scrap heap in any event.

Let’s break it down. If you look at infusions of taxpayer money of $5 billion or more since last October, you will find that, on balance, Uncle Sam is a terrible investor. That’s a total of $268.1 billion invested. As of Friday’s close, our portfolio was worth just $202.4 billion. We’re out almost $66 billion in six months. On an annualized basis, that’s a 32.2 percent loss. Putting all that money into a plain-vanilla S&P 500 index fund would have lost us just 4.4 percent during that time.

How did we calculate this? To simplify, we assumed that all government investments were through buying common stock, calculated the share price the day of the investment, and then how much those same shares were worth Friday afternoon. To be fair, most of the investments weren't in common stock, but rather so-called preferred stock, which is essentially common stock that pays a dividend. In the majority of these cases, that dividend was 5 percent. Factor those dividends in, and our loss still runs about 27 precent—more than six times the decline of the S&P 500. For those scoring at home, it breaks down, in billions, like this:

DATE            COMPANY                 INVESTMENT    CURRENT VALUE         +/-

10/28/08        Wells Fargo                        $25.0                     $14.1               -43.4%

10/28/08        JPMorgan Chase               $25.0                     $21.4               -14.3%   

10/28/08        Citigroup                            $25.0                      $5.6                 -77.7%

10/28/08        Bank of America                $15.0                      $5.6                 -62.3%

10/28/08        Morgan Stanley                 $10.0                      $17.1               +70.7%

10/28/08        Goldman Sachs                 $10.0                     $13.6               +35.5%

11/14/08        U.S. Bancorp                     $6.6                        $4.5                 -32.2%

11/25/08        AIG                                    $40.0                      $31.2               -22.0%

12/31/08        Citigroup (2nd )                 $20.0                      $8.9                 -55.4%

12/31/08        PNC Financial Services    $7.6                        $5.8                 -23.5%   

12/31/08        SunTrust Banks                $4.9                        $2.2                 -53.6%

01/09/09        Bank of America (2nd)      $10.0                      $6.7                 -33.3%

01/16/09        Bank of America (3rd)      $20.0                       $24.2              +20.8%

01/16/09        Citigroup (3rd)                  $5.0                         $4.3                -14.6%

02/17/09        General Motors                $14.3                       $11.8              -17.4%

04/17/09        AIG (2nd)                         $29.8                       $25.4              -14.8%

                              Total                        $268.1                     $202.4            - 32.2%  

As you can see, we have the bad habit of buying as the stock prices continue to fall. Didn’t anyone tell Tim Geithner that there is a time to let a losing bet go? We made a $40 billion investment in AIG when its stock was trading for $1.77 a share. (Note to Uncle Sam: Penny stocks…not good.) We doubled down with an additional $29.8 billion when it was at $1.62 a share. We’re now out $13.2 billion on the combined purchases. I know we were bailing out Goldman Sachs—AIG’s largest counterparty—but why didn’t we just let AIG fail and invest in Goldman instead?

The same goes for Bank of America. We bought $15 billion worth of that dog when it was trading at $23.02. Then we threw in $10 billion more when it was at half that, of $12.99 a share. Caution? To the wind. Then an additional $20 billion at $7.18. (The stock traded for $8.67 a share as of Friday, so that last one might actually work out, but that doesn’t make up for the $12.7 billion we’ve lost on the first two purchases.) JPMorgan’s Jamie Dimon bought Bear Stearns for a song last March. Ken Lewis of Bank of America was just trying to chase Dimon’s shadow when he bought Merrill Lynch in September. Couldn’t our government see that this was nothing but the desperate move of a second-place finisher?

Of course, let’s not forget who came in last. Our worst investment was Citigroup. We’ve lost 77.7 percent on our $25 billion October investment in that goat. Why again does CEO Vikram Pandit still have a job?

What are Uncle Sam’s best investments? Goldman Sachs, for one. Bought that baby at $93.57 and it’s now trading for $126.79. That’s a 35.5 percent gain. Congratulations. This company has long defied all expectations, and continues to do so. Why did we buy into AIG and Citigroup when we could have actually bought Goldman whole-hog, for a cut-rate price? Same with Morgan Stanley. Bought it at $15.20, now trading at $25.94. That would be a 70.7 percent win. Good work there.

In fairness, this exercise, aided by Morningstar.com's nifty portfolio calculator, ignores the fact that the government was buying stakes in many of these companies because no one in the private sector was willing to. Less to profit from them than save them. But that doesn't change the facts that more money could have been made for the U.S Treasury by throwing darts at the stock quotes in the newspaper. Or having a monkey throw the darts. Or maybe by just investing in the darts themselves.

Duff McDonald is a contributing editor at New York magazine and a former contributing editor at Condé Nast Portfolio. He is working on a book about Jamie Dimon, chairman and CEO of JPMorgan Chase, to be published by Simon & Schuster in the fall of 2009.