Published: July 2, 2010
"I went to the bank with $1,000 today,
to open a bank account," my friend Lee told me. "The bank turned
me down - they said it was too risky."
"Wait a minute, you went there to borrow $1,000?" I
"No, I went there to deposit $1,000 - to open an account."
What has our world come to?
I can see how lending money to Lee could be risky. But Lee was
handing the bank $1,000.
The bank has no risk... It only has upside. By accepting his
account, the bank is starting a relationship that could go
somewhere. The bank can make money off Lee's money. It will
invest his cash and pay Lee no interest. And it can charge Lee
fees - overdraft fees, ATM fees, whatever.
What has the world come to today, when a local bank won't accept
Think about this...
Three years ago, Lee could have probably gotten a no-money-down
mortgage for a few hundred thousand dollars from this same local
bank. Banks were foolish risk-takers back then.
But today, Lee can't even open a bank account... I guess banks
have burned themselves so badly, they've moved from being
foolish risk-takers to being foolishly conservative.
The crazy thing is, now is the ideal environment for banking...
Banks can borrow money at ZERO percent, or very close to it. And
banks can lend it out, risk-free in some cases, for 4% or more.
This is the business of banking... Banks make their money on
this interest rate "spread." And the spread is as wide as it
gets right now.
As an investor, what you want is a bank that can earn this
spread, a bank that owns no bad deals.
The ideal "bank" for this situation is what I call a
"government-guaranteed virtual bank."
Annaly Capital (NYSE: NLY) is the flag-bearer here. It's
like a bank. It earns an interest rate spread. But unlike a
typical "bricks and mortar" bank, it doesn't have any branches -
so I call it a virtual bank.
And unlike a typical bank, Annaly doesn't make loans to local
businesses or on properties. Those have credit risk. Annaly has
no credit risk. It invests 100% of its money in 100%
government-guaranteed mortgage bonds. The government is stuck
with the credit risk on everything it owns.
The numbers now are fantastic. Annaly currently pays a 16%
dividend. I challenge you to find a dividend that high, that's
this safe, anywhere in the world.
It's an ideal time to be a banker. The interest rate spread is
But most banks are doing ridiculous things... like turning down
$1,000 deposits as "too risky." (They should take deposits like
that and invest them in guaranteed mortgage bonds, like Annaly
Meanwhile, super-safe Annaly trades very cheap, right at book
value (which is roughly liquidation value in this case). I
expect shares of Annaly will trade up to a 30% premium above
book value once people figure this story out. That's a 30% gain
in the stock, plus the 16% dividend... So you could see a 46%
return here, in a year... safely.
"So what are you going to do?" I asked Lee, getting back to the
story I started with.
"I don't know," he said. "I was hoping to build up some credit
again. But for now I'll just use PayPal or something. I'm not
sure what to do."
"Bricks and mortar" banks are apparently foolishly fearful right
now. But virtual bank Annaly - with no credit risk - is not
afraid. And right now, it is a great opportunity.
The safest, highest-return way to invest in the ideal banking
environment is to buy shares of Annaly.
-- Dr. Steve Sjuggerud