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MajorBob04 (99.06)

When Will the Banking Industry Clean Itself Up

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July 23, 2012 – Comments (8) | RELATED TICKERS: MS , WFC , BAC

I really don’t expect the banking industry to clean itself up.  Back in the ‘90’s I was annoyed that they were considering permitting banks to expand.  I was frustrated when the Glass-Steagall Act was repealed, and of course I was shocked when I read all the stories of what happened during the financial crisis. But I don’t think the banking industry will clean itself up.  Sure they’ve made tremendous strides cleaning up their books, tightening lending, reducing risk, and controlling “rogue” traders (compared to their total risk), BUT until the executives are truly held accountable, and that includes firing them or reducing their pay significantly, I don’t think there will be enough progress.

I struggle to invest in banks, because I don’t understand them very well. I’ve tried to understand, but I can only make a lot of assumptions.  There are so many complexities, I just hope that they are managing their money well.  But I cannot invest merely on hope.  I have to stick with companies I can understand (at least to a point).  Sure, I will invest in the banks that appear to be healthier and doing reasonably well because I think I will miss out on great gains if I don’t, but it’s just not clear to me how they will make money and avoid major problems without taking on big risks that eventually blow up, either for the bank or for the broader economy.

Here are a couple great articles on this topic from the Financial Times. I like the opinion piece by Mike Mayo, because I know him personally, but I don’t think his appeal will significantly impact bank executives, thus I think the second article will ultimately be correct: Investors will demand change.  After all, if you own stock in a company, you are one of the owners . . . and as an owner, I believe that eventually the owners will demand the change.

Act ahead of outsiders Mr Dimon

By Mike Mayo

Here’s another crucial distinction that gets lost in all the populist outrage: capitalism did not cause the financial crisis, or the problems in the banking sector since then. Instead, it was a distinct lack of capitalism: insufficient oversight, ineffective regulation and a void of accountability. Markets are effective at punishment – JPMorgan has lost more than $22bn of its market value since its trading loss – but less so at ensuring positive permanent change.

Instead, we need to hold the worst performers accountable. Look no further than banking’s Bermuda Triangle: Citigroup, Morgan Stanley and Bank of America. All three stocks have underperformed the S&P 500 by 75 per cent under the tenure of their current chiefs, but most investors have not said “boo”. They vote with their feet and the ineffective chiefs remain in place.

. . . Yet so far, we are still waiting and my fear is that nothing will happen even to the Bermuda Triangle. Is it any wonder that outsiders are threatening stricter regulation? Senator Sherrod Brown from Ohio wants to break up the big banks, with no differentiation for those with strong balance sheets, reasonable strategies, or track records of success. In this view, Wells Fargo, which has performed well lately, is no different from Citigroup, which has lagged behind for years.

More here:

http://www.ft.com/intl/cms/s/0/4ca07764-b576-11e1-ab92-00144feabdc0.html#axzz21U9HnNkf

Breaking up banks will win investor approval

By Sebastian Mallaby

Investors’ scepticism shows up in share prices. The stock market capitalisations of Citigroup and Bank of America languish at half and three fifths of tangible book value, respectively – liquidating Citi could hand shareholders a gain of 100 per cent. Indeed, because banks’ assets include infrastructure that could be sold for much more than book value, the bonanza might be even bigger. JPMorgan’s market capitalisation is roughly equal to its book value, but analysts reckon that the bank might be worth about a third more dismembered than intact.

More here:

http://www.ft.com/cms/s/0/db154ff6-cf4d-11e1-a1ae-00144feabdc0.html#ixzz21UCVy3Gg

8 Comments – Post Your Own

#1) On July 24, 2012 at 11:31 AM, Teacherman1 (47.99) wrote:

Major, have you looked at some of the "regionals"?

I bought them on a "market panic" day, so I got back into them at a relatively low price, but even at today's price, they are still good long term buys.

Because I like to buy "low, lower, and lowest", I am not adding right now, but will add on any significant dips.

There have all had their problems in the past, but those who were in charge then, are all gone, and they have become profitable and have paid off their TARP.

HBAN

KEY

RF

JMO and worth exactly what I am charging for it.

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#2) On July 24, 2012 at 2:31 PM, outoffocus (24.48) wrote:

Ok good. I thought your headline was a trick question.  The banking industry will never clean itself up.

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#3) On July 24, 2012 at 3:12 PM, Melaschasm (89.97) wrote:

As long as the federal government garauntees that mega banks will be protected from losses, there is no incentive to change.

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#4) On July 24, 2012 at 3:18 PM, leohaas (91.57) wrote:

The short answer to the question in your headline: when pigs fly.

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#5) On July 24, 2012 at 3:29 PM, MajorBob04 (99.06) wrote:

@Teacherman1: Thanks for your suggestion.  To answer your question - no - I haven't looked at Regional Banks yet. That's probably a logical choice now though.  I don't think I'll ever understand or be able to keep up with the "Too Big To Fail" banks, thus Regional banks are probably a better choice.

I will take a look at the ones you suggest.  Do you know anything about M&T Bank?  They bought out my bank cheap because it was in trouble. 

@outoffocus: Yep, it is a bit of a trick question.  Thanks for your comment.

@Melaschasm, leohaas: Agreed!

 

 

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#6) On July 24, 2012 at 4:48 PM, Valyooo (99.81) wrote:

I really don't understand this mentality of hating the banks.  Yes, they did a lot of stupid things, and are full of greedy sleezeballs.  So what?  The only ones who should be angry are investors.  Other companies are allowed to lose money.  I don't see people  up in arms calling Pandora an immoral company because it loses money.  Banks have the right to lose money like anybody else does.  The investors take those losses, and the bond holders.

The fact that the federal gov bails them out is not the banks fault...people should be mad at congress, not the banks.  The banks are stupid, but that is not illegal.

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#7) On July 24, 2012 at 5:30 PM, MajorBob04 (99.06) wrote:

 I really don't understand this mentality of hating the banks.  Yes, they did a lot of stupid things, and are full of greedy sleezeballs.  So what?  The only ones who should be angry are investors.  Other companies are allowed to lose money.  I don't see people  up in arms calling Pandora an immoral company because it loses money.  Banks have the right to lose money like anybody else does. 

 

Who said I hate Banks? 

I think they can serve a great purpose in society. But I also think they should be banks.  Banks that hold and safeguard your money. And lend to people to make money, without jeopardizing the economy because they're too big or take on too much risk with low capitalization. They should NOT be investment banks.

The difference between Pandora and the banks is that if Pandora fails they go out of business. They certainly impact investors, bond holders and investors. But if a bank goes bankrupt, then by definition the FDIC has to help return customers money. And other banks need to step in to ensure liquidity in the inter-bank and inter-company transactions. But if that bank is Too Big To Fail, they will pull down the entire economy, and the government, and and . . . 

I don't hate banks. I just want them to get out of the risky trading business. And open their books again so that it's more clear how they make money on a quarterly basis. 

Have you ever looked at how big banks move assets around before and after quarterly reports? Have you ever tried to figure out how Credt Default Swaps really work?

Understanding modern banks is different than understanding manufacturers, service companies, technology companies. 

 

 

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#8) On July 24, 2012 at 7:19 PM, Teacherman1 (47.99) wrote:

Major

M&T Bank MTB, is a good, solid, old fashioned bank, owned mostly by institutional holders, including Berkshire.

They are what most of the "big banks" used to be in years past, a minimal growth, mature, stable dividend payer.

They got whacked in the spring of 2009, like the others, but only because of what the others did, and suffered "guilt by association". That was the last time they were a "bargain".

They can swing in a 10% range when the market is going wild, or just after the dividend date, when some sell off for a short while, but for the most part, if you are looking to purchase them, it should be as a dividend provider, they are not likely to have any "great leaps forward". At the same time, they are highly unlikely to fall much either.

I looked at them a couple of years ago, not to buy, but because they were the main sellable asset of another bank I was in at the time AIB, and I was looking to see how much selling them would help AIB. Unfortunately for AIB, not enough, but fortunately for me, I got out of AIB before it collapsed.

If you think you might want to buy some shares for reliable dividend income, you might want to wait for a EuroPanic day to do so. You might be able to get them about 10% cheaper than they are now.

JMO and worth exactly what I am charging for it.

BTW, while I am not in the ranks of your friend Mr. Mayo, I was a commercial banker for 15 years, many years ago, and am old enough to remember when there was near panic over the "big banks" being at great risk because of the 2 or 3 Billion dollars that were at risk of default from their South American misadventures. That's when John Reed shot to the top at CitiBank, because the retail side had to rescue the commercial side.

Today, 2 or 3 Billion is "office supplies" for the big ones.

By the way, Goldman and Morgan Stanley are "banks" in name only, which they became during the crisis through rushed through approvals, so they could borrow from the bailout pot. They are investment banks through and through.  JPM is a combination of investment/commercial, while Wells, Citi, and BofA are regular banks now, but need to do a lot of work to get back to basics.

Have a great week.

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