Is now the time to buy U.S. bank stocks? Many are earning money, look well capitalized and have reported three straight quarters of declining loan losses. Yet the sell-off of the past six weeks has lopped up to a fifth off the value of large and regional players alike, pushing even strongholds such as JPMorgan back to book value or below. That ought to be a bargain.
Some investors certainly seem to think so. Bill Ackman recently bought 150 million shares of Citigroup. Appaloosa’s David Tepper likes Bank of America, as does renowned hedge fund manager John Paulson, who increased his stake in the Charlotte-based lender by 11 percent in the first quarter. He told his own investors late last year the stock could hit almost $30 a share — double where it is now.
There doesn’t seem to be much Goldman Sachs boss Lloyd Blankfein can do to silence his critics these days. The Wall Street firm’s decision to set up a business standards committee is a smart idea that could help shore up its reputation — and improve its relations with clients — but only if Blankfein gives the new watchdog real teeth.
The clearest way to do that is to ensure that the committee’s members have the power to say no to traders focused on making a fast buck that could damage the reputation of the franchise in the future. Blankfein reckons Goldman already does that, telling senators in April that the firm believes in rewarding “saying no as much as saying yes.”
By Antony Currie and Nicholas Paisner
Traders have become magicians. Not only can they make crafty products appear practically from thin air, they’re also churning out profit as easily as conjurors pull rabbits from hats.
Look at the first quarter. Not long ago, analysts expected fixed income, currency and commodities desks to have a relatively humdrum quarter. Yet most such units reported stellar numbers.
James Gorman failed to deliver blowout earnings in his first quarter running Morgan Stanley. Trading and investment banking revenue, for example, was largely below rivals. But neither the new Morgan Stanley chief nor shareholders should be grumbling at the $1.8 billion earned by the Wall Street firm in the first three months of the year.
The bottom line includes a $382 million tax benefit from keeping earlier undistributed non-U.S. earnings abroad for reinvestment. But even without this, Morgan Stanley still posted a 13.1 percent return on equity. That’s not as juicy as Goldman’s 20.1 percent ROE, or the 25 percent JPMorgan’s investment bank reported. But after a year of either losses or lowly returns, it’s still a welcome improvement.
The Securities and Exchange Commission has lit a fire under all the smoke billowing around Goldman Sachs. The bank has become the popular totem for public anger over Wall Street greed. But so far Goldman has been embroiled in little more than a war of words. Now the SEC has accused Goldman and one of its employees of securities fraud related to how they structured and sold a synthetic collateralized debt obligation backed by subprime mortgages in 2007. The stakes couldn’t be higher.
After all, despite all the smoke about Goldman’s conflicts of interest, clients have hardly run from the building. The firm still sits atop, or near it, in many investment banking and stock sales businesses. And in 2009 it traded with 6,000 customers, a third more than three years before. That helped the firm make a whopping $13.4 billion last year.
It’s unlikely all those clients consider Goldman to be a paragon of virtue. Many probably even scoffed a bit at Chief Executive Lloyd Blankfein’s insistence in last week’s letter to shareholders that the firm only acts in the interests of its customers.
Can a bank be “too clubby to fail?” Former Washington Mutual boss Kerry Killinger thinks so — and reckons WaMu’s outsider status explains why it wasn’t bailed out in September 2008. The circumstances of the West Coast lender’s demise do raise legitimate questions. But if anything, WaMu was more sacrificial lamb than outcast.
Killinger, who was ousted as chief three weeks before the bank went under, pointed out that WaMu was excluded from the Treasury’s initial July 2008 list of financial firms whose shares speculators could no longer short. The Federal Deposit Insurance Corp also made the highly unusual step of seizing the bank on a Thursday rather than a Friday. And if regulators had waited just a week longer, WaMu, he argues, would have benefited from a number of government programs that shored up the banking system.
The new start at General Motors isn’t as fresh as it looks. Last year’s quick-rinse bankruptcy washed away almost $90 billion of debts and other obligations. But there are still wrenches in the Detroit automaker’s gears that its Chapter 11 restructuring was supposed to remove more cleanly.
Sure, in the six months since emerging from bankruptcy GM almost eked out a profit before interest and taxes, after stripping out a couple of big one-off items. As the economy improves, GM should have a good shot at climbing out of the red before 2010 ends.
The forensic autopsy of Lehman Brothers appears to have found the many causes of death. The examiner for the bankruptcy court, Anton Valukas, portrays the investment bank’s chief Dick Fuld and his lieutenants as more hubristic and inept than first thought. The scathing report also details a series of balance-sheet shenanigans that could land the former top brass and their auditor, Ernst & Young, in court.
Among the toxins discovered was something called Repo 105. This accounting gimmickry masked the size of Lehman’s balance sheet as the pressure grew for investment banks to reduce their leverage at the end of 2007 — which Lehman also was doing at the time.
Even if Repo 105 wasn’t lethal it was certainly poisonous. Lehman had been abusing it as far back as 2001, using repurchase agreements to finance assets but, unlike with typical repo transactions, treating them for accounting purposes as sold. This enabled Lehman to cover up its true leverage, making it seem lower than it actually was. Lehman even needed its overseas subsidiary to make it work sometimes. Bart McDade, the Lehman executive in charge of shrinking the balance sheet disparagingly referred to Repo 105 as “another drug we r on.”
The U.S. private-label mortgage bond market may be about to crawl out of its bunker. The housing-induced credit crisis bombarded it into hiding almost two years ago. But a handful of firms, independently of each other, are working on deals that could hit the market by June.
Any new issue of mortgage bonds lacking guarantees from government-run agencies Fannie Mae and Freddie Mac will need to be squeaky clean — and the seller may lose money.
Brian Moynihan can talk the talk. He made a good impression on Wednesday in his first solo presentation since becoming chief executive of Bank of America at the start of the year. He hit all the right notes, promising to put relationships, risk management and cost controls ahead of rapid growth and serial acquisitions. That was reassuring, but hardly a difficult call. Walking the walk is his next challenge.
It was the penchant of Moynihan’s predecessor Ken Lewis for empire-building that landed the megabank in trouble and in need of $45 billion of emergency capital from the U.S. government. So the new chief executive is safe talking about consolidating the business BofA already has.