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buffalonate (68.40)

Why Banks Are A Buy



May 05, 2011 – Comments (0)

The best way to determine the health of banks is through their tier 1 credit ratio.  This number has been rising across the board for banks the last few months.  The American Bankers Association recently announced that loan defaults are down across all 8 categories.  Every large bank was profitable in the last quarter.  I recently bought stock in many large banks because they were at technicals lows for the month and the fundamentals were improving. 

 Before I purchased them I researched the financial reform bill to see how strong it was because I had heard it was weak.  I found that it was much stronger than I was lead to believe.  The bill more than doubles capital requirements which makes banks much more capable of dealing with losses in the future.  The bill also significantly reduces the leverage investment banks are allowed to use.  The bill also requires banks to keep 5% of the bonds they create.  This prevents the banks from selling off bonds that are very risky.  The bill also requires banks to verify income for loans and exposes them to stiff penalties if they do not.  The bill also gets rid of the conflict of interest of the credit rating agencies.  Here is a link to the reforms for credit rating agencies. is a link to a summary of the reform bill.  Experts have determined that half of the financial crisis was due to the endless money supply provided by Fannie Mae and Fannie Mac.  Congress has recently stated that they intend to wind down both agencies in the near future.  With all of these reforms the risk of a major financial collapse in the future is very small. 

 Since almost all of the banks are at a historically low value I think the best way to play this is just to buy a large bank etf(kbe) and forget about it for a couple of years.  By buying a banking etf you get the upside of the industry without the risk involved with buying individual stocks. 

I know some people on this site think that the only reason banks are profitable is that they changed the mark to market rule for banks.  They did this because during the crash the market for mortgage bonds froze up and no one would buy bonds because they didn't know what they were worth.  If they didn't change these rules every bank would have been forced into bankruptcy because for a short time these bonds had no value.  With the mark to market rules gone banks just wrote off most of the value of the bonds and then changed the value of those assets when information came in that allowed them to better value the bonds. 

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