Invest in the Best-Connected Banks

Ted is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Let's get one thing straight: the big banks will always win. Don't get distracted by the sideshow complaints about too much regulation dampening profits; no matter how onerous the regulation, the Federal Reserve's resolve to ensure that banks reap profits will always prevail. When an economy is managed by private bankers, the bankers will always be taken care of. So don't fret when you own Goldman Sachs (NYSE: GS) at 11x earnings, or JPMorgan Chase (NYSE: JPM) at 0.8x book. Bank of America (NYSE: BAC) at less than half of book? What a steal!

As a value investor in the tradition of Warren Buffett, I don't spend much time studying the "macro" picture; after all, if all I do is buy good businesses for less than they are worth, I will compound my wealth at a high rate over time. However, sometimes it is important to understand the bigger picture in order to grasp an investment opportunity.

It is easy to get caught up in the nasty rhetoric between Wall Street and Washington D.C.; the banker elite and their minions in government have put on a good act. But I'm out to make money, which forces me to see the harsh reality: the politically-connected thrive, while those not in the club are forced to make their way haphazardly through a broken economy. Thus, the investment merits of banks today are based on their connections to those who manage the economy, rather than any sort of competitive advantage or superior operational strategy they may have. Here are a few of the best-connected banks:

Goldman Sachs

Goldman is notoriously well-connected and spends millions lobbying Congress and donating to political campaigns. Employees and their relatives donated nearly $1 million to Obama in 2008 and the same amount to Romney in 2012. CEO Lloyd Blankfein has visited the Obama White House on multiple occasions since 2008, and let us not forget that the bank has a direct line to the Federal Reserve. If there's a bank that can thrive amid popular uproar, it's Goldman Sachs.

JPMorgan Chase & Co

Investors need look no further than the board of the New York Fed to gain confidence in JPMorgan's investment merits. CEO Jamie Dimon sits on the board that advises regulators on how to regulate his bank. As if that weren't enough, Dimon is also chummy with the Senate's banking panel. In addition, JPM employees are impartial when making campaign contributions, having contributed millions to both Republicans and Democrats over the past decade. Combined with superior operational management, JPM's connections make the bank a steal at 0.8x book.

Bank of America

At .46x book value, BAC is the most attractive of our politically-connected banks. According to opensecrets.org, the bank's $2.1 million in contributions put it among the top 10 donors in the recent election cycle. BAC has also received votes of confidence from noted value investors Warren Buffett and Bruce Berkowitz. It's hard to pass up a too-big-to-fail bank trading at half of book value, but it's almost impossible to ignore when Buffett and Berkowitz pile in. If you believe that BAC can survive another downturn without massive dilution, it looks attractive here.

Conclusion

Value investors are known to shy away from investing in banks. The common excuse is that there's limited visibility into the balance sheet and there are no durable competitive advantages in banking. However, if one looks at the big picture and realizes who is in charge, simply picking up the best-connected banks is a good strategy no matter how nasty the rhetoric gets. At the end of the day, the central bank will always take care of its own, and the politicians will yield to the institution that allows them to spend recklessly in order to win re-election. When deciding how to position your portfolio for the political turmoil that lies ahead, it's a no brainer: buy banks.


titans8904 is long BAC TARP warrants. The Motley Fool owns shares of Bank of America and JPMorgan Chase & Co. Motley Fool newsletter services recommend Goldman Sachs Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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