September 17th, 2008 by Michael Oliver

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Anyone who has been watching the news has obviously seen and heard about all the issues that are rocking the financial world. Insurance companies that wrote policies intended to minimize risk for all the mortgage-backed securities the banks were dealing in are getting hammered this week in the stock market. Merrill Lynch was purchased by Bank Of America, Lehman Brothers had to file for bankruptcy, and maybe worst of all, AIG was on the verge of filing for bankruptcy before the Fed gave them an $85-billion loan to keep them afloat. AIG is one of the largest (if not the largest) insurance companies in the world. The man responsible for their growth from a small insurer to a titan is Hank Greenburg. While Hank will certainly still have plenty to live on, he has lost roughly $6,000,000,000 (yes that’s 6 BILLION!!) dollars in the past week! Talk about a bad week. Now, AIG’s situation isn’t necessarily their own doing, but their downfall was the result of not understanding how much risk there was in the policies they were writing while not collecting enough in payments to cover all the claims they are paying out.

So, what’s going to happen now? Tough to say, but this has been coming for several years. The last six months have been a washout period for banks, insurers, builders, and everyone who has any business interest related to the American real estate industry. All these companies are being completely dismantled, and those that are not leveraged correctly are being taken over or out of business. This, in my opinion, is something that just has to happen. The real estate market was overheated for five years, and now we’re seeing the other side of the coin. Until this reaction gets through the system, it will be more of the same. I still think that while people should wait for everything to shake out completely, bank stocks are a good buy. I find it hard to see any situation in which bank stocks could be worth less than they are now, and at the end of the day, they seem dirt-cheap. The company I like the best here is Bank of America. It is the one buying up all the troubled companies at cheap prices. Earlier this year they bought Countrywide for roughly $4 billion. Now they have Merrill Lynch & Co., Inc. (MER) under their wing. Both of these acquisitions will make this bank very big and strong when the current market turmoil subsides. Furthermore, when the real estate market was really hot, Bank of America was very tight in their lending standards — maybe the most stringent among all the retail banks. They now don’t have to worry about billions in bad loan costs like other large banks that are writing down billions every quarter. Banks like Washington Mutual, Wachovia, and Wells Fargo come to mind. They were heavily involved in providing exotic mortgages and underwriting policies that have come back to bite them recently.