Search results matching tag 'banking'

Investing in banks that do right by their shareholders

Ken Kam — Fri, 23 Oct 2009 21:11:00 GMT

Banks are reporting great earnings. But this is to be expected because making banks profitable is the most politically palatable way for the government to recapitalize the banking system. The government accomplished this by holding interest rates that banks have to pay on their deposits to almost zero and relaxing the accounting rules so they don’t have to be diligent about writing off their bad loans.

It looks to me like the plan is working. If this continues, the banks will make enough money to earn their way out of the bad loans that are still on their books.

Some banks are putting their executives’ interests ahead of their shareholders’, by using the lion’s share of the profits to pay record bonuses. Other banks are using the profits to do things more in line with their shareholders’ interests — paying back TARP, making acquisitions, and rebuilding their capital without diluting shareholders.

Now that profits are rising, I think banks that are using the profits to do right by their shareholders are going to be good investments. Two picks from Marketocracy mFOLIO Master Eugene Groysman, that I have written about in the past are US Bancorp (USB) and Barclays (BCS). Both still look good at current prices. I think these two banks may be among the first to start to restore their dividend.

It can be hard to find these articles after they scroll off the front page. So, if you would like to be notified via email when I post a new one, click here.

Ken Kam, Marketocracy Data Service's Editor in Chief, also is portfolio manager for mutual and hedge funds advised by a Marketocracy affiliate. Before relying on his opinions, always assume that he, Marketocracy, its affiliates and clients have material financial interests in these stocks and hold or trade them contrary to those opinions. Click here to continue reading for more detailed and important disclosures, disclaimers, limitations and material conflicts of interest.

Break up the banks

Jim Jubak — Wed, 21 Oct 2009 16:15:00 GMT

Finally, someone with real power in the current financial world has stated the obvious: The world's big banks need to be broken up into utilities that do what you and I think of as banking, and speculative trading companies that take risky bets on the markets with their own money.

The speaker of such truths: Mervyn King, Governor of the Bank of England.

Proposed market reforms, including rules that would require banks to raise more capital, don't address the basic danger posed by banks that are too big to fail, King said in a speech on October 20 in Edinburgh.

Requiring banks to keep more capital wouldn't create a big enough margin of safety as long as big banks were free to engage in unlimited risk taking with the expectation that taxpayers would pick up the tab for any losses large enough to endanger the financial system.

King echoed recent comments from former Federal Reserve chairman Paul Volcker, who now serves as an advisor to the Obama administration. Volcker has called for separating retail banking from trading units that risk the bank's own capital in the markets.

King's speech puts added pressure on British Prime Minister Gordon Brown to deliver promised regulation that would require banks to write living wills that regulators would use to wind down a bank if it faced bankruptcy.

And King's words actually stand some chance of changing government policy. The United Kingdom is in the midst of an election campaign that's like to turn Prime Minister Brown's Labor government out of office. The Conservative Party, currently in the lead in polling, picked up on King's remarks to criticize the government's policies during the crisis.

Here's my favorite line from King's speech: “The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion.”

Can't ask for anything clearer than that.

Over to you in the United States, Chairman Bernanke and Secretary Geithner.

Credit losses threaten bank recovery

Anthony Mirhaydari — Sat, 17 Oct 2009 01:28:00 GMT

The Dow Industrials tumbled back under the psychologically important 10,000 threshold on Friday after some surprisingly bad news from the banks jarred the bulls out of their complacency.

Bank of America (BAC) reported a third-quarter loss of $2.2 billion or 26 cents per share, falling below the consensus estimate of a 12 cent loss as its consumer credit portfolio continues to deteriorate. Similar problems plagued Citigroup (C) when it reported a 27 cent per share loss on Thursday. The results would've been even worse if not for some accounting trickery surrounding the amount of money set aside for future loan losses.

Remember that it was news the banks had returned to profitability back in March that got the equity rally going in the first place. Now, after a 53% rise in the Dow and a 146% increase in bank stocks as represented by the Financial SPDR (XLF), one wonders: Will the beleaguered financial system deal yet more damage to the real economy as loan growth is tightened and fresh losses recognized? It's too early to say, but the banks are already balking at plans to increase capital requirements. Moreover, there is evidence that the consumer loan delinquencies that have dampened Q3 results are about to get worse.

According to Credit Suisse analysts, an improvement in consumer credit loss rates is still over a year away given that losses didn't peak in the 1990 credit cycle until well after unemployment reached its zenith. This will come as a surprise to many, given the improvement in early stage delinquencies back in the spring and summer months. Some of this was probably tied to the payment "holidays" and other forbearance policies the banks put in place around this time that have since expired.

Seasonality is another factor, as the spring and summer months tend to have lower rates of delinquency. Unfortunately, we're entering a period of the year -- surrounding the back-to-school and holiday shopping seasons -- in which consumers tend to fall behind on their payments.

Given the data, I have a feeling the news flow out of the financial sector will take a turn for the worse over the next few quarters. No longer can the bulls depend on surprise profits from the banks to jolt the market higher during earnings season. They'll have to find another catalyst.

Disclosure: The author does not own or control a position in any of the funds or companies mentioned.

Anthony Mirhaydari is a researcher for the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.

Related reading:

Stock bulls await the dollar's collapse

The rebirth of the American consumer

Federal Reserve restarts the money pump

Why stocks look oversold

Paulson's little white lie

Douglas McIntyre — Mon, 05 Oct 2009 16:02:00 GMT

It seems that Henry Paulson was a bit too optimistic about the prospects of several banks which received TARP funds at the end of last year.

The Treasury Department’s inspector general Neil Barofsky reports that the department “lost credibility” when its top officials claimed that the first capital injections from the $700 billion financial rescue were for healthy banks. At the time, Bank of America (BAC) and Citigroup (C) were actually in a great deal of trouble.

The inspector’s report states “Treasury may have created unrealistic expectations about the institutions’ condition and their ability to increase lending.”

It was, perhaps, only a little white lie. Paulson and Bernanke knew that confidence in the credit markets was worse than fragile as the financial crisis spun nearly out of control. They also knew that the TARP was likely to keep large banks from failing, at least for a few months, while the world credit system had a chance to catch its breath.

Paulson probably believed that misleading the public was the lesser of two evils. He could have disclosed everything he knew about the health of the banking system, particularly information about the most troubled banks, and caused a panic worse than the one which was already in progress -- or he could have kept his mouth closed and hoped for the best from the TARP investments.

Paulson chose to omit all that he knew when talking to the public and the media, a type of moral relativism. It was probably an excellent idea.

Top Stocks blogger Douglas A. McIntyre is an editor at 24/7 Wall St.

Related:

500 Largest Companies

TARP recipients abuse borrowers

Jim Van Meerten — Mon, 05 Oct 2009 15:23:00 GMT

Over the weekend, McClatchy Newspapers had two powerful articles entitled "Help with mortgages is difficult to come by" and "Some firms with spotty pasts get tax dollars."

The articles expose how firms like Bank of America (BAC), Citigroup (C) and Morgan Stanley (MS) -- firms who were bailed out from the brink of bankruptcy by TARP with billions of taxpayer dollars -- are now abusing mortgage borrowers who are in trouble. The Treasury is doing little, if anything to monitor the situation.

In one case, Ronnie Fruia was about to lose his home when he, his mother and son were all hospitalized. He was recovering from a stroke and couldn't talk, but CitiFinancial sent someone to his hospital room to sign modification papers that didn't even cut his interest rate. State regulators had to step in to get his rate changed from 11.5% to a reasonable 5%.

In another case, Countrywide, a subsidiary of Bank of America, put a woman in default while she was being treated for breast cancer. Her church had raised money to keep her mortgage out of default but Countrywide refused to take a payment from the church.

Saxon Mortgage Services, a unit of Morgan Stanley, was sued by the attorney general of Missouri when he found that Saxon failed to properly credit loan payments to accounts even after the borrowers had proved that the payments had cleared their bank accounts. They even charged late fees though the mortgages were current.

The Government Accountability Office (GAO) in July found that the Treasury was short-staffed and had hired only half of the employees necessary to monitor the loan modification program.

Taxpayer dollars bailed out the banks from bankruptcy. Now the banks are on track to pay big bonuses while at the same time foreclosing on the very taxpayers who bailed them out. They have only worked with 12% of the mortgage holders that qualify for the Treasury's mortgage modification program.

Isn't it ironic that the bailout money goes to the very firms that invented these adjustable loans that got borrowers into this mess -- and now they turn their backs on borrowers trapped in their predatory lending schemes?

Jim Van Meerten is an investor who shares his opinions on financial matters on Financial Tides, MSN Top Stocks Blogs and Seeking Alpha. Please leave your comments below or email FinancialTides@gmail.com.

Disclosure: I hold no positions in the companies mentioned in this post.

Ken Lewis' $125 million goodbye

Douglas McIntyre — Fri, 02 Oct 2009 10:38:00 GMT

When Ken Lewis finally leaves Bank of America (BAC), he will get a $125 million goodbye from the financial firm, unless the federal government’s pay czar decides to challenge the package.

Most of the Lewis compensation was set long before the big bank got into trouble and had to take $45 billion in TARP funds, so his employment contract may be sacrosanct. If so, he will get one of the largest severance packages in American corporate history.

According to Reuters, Lewis’ severance package "includes $53.2 million in retirement benefits, mostly from a program frozen years ago, and $72.8 million in accumulated stock and other compensation."

The question now is whether the new government pay czar, Kenneth Feinberg, may try to void the arrangement. Probably not. The Administration does not want to be seen as violating contract law. Feinberg has not challenged a $100 million bonus to Citigroup (C) commodities trader Andrew Hall, probably because the compensation was part of a written deal with the bank.

Feinberg’s problem with Lewis may end up being very simple. Once the government abrogates one contract, how many more can it cancel? That raises the question of whether any compensation agreement between a large Wall Street firm and an employee will be honored.

It also raises the specter that the government may not honor contracts in other parts of the business sector if companies are taking federal money for any purpose. Contract law violations would certainly be tested in the federal court system. Feinberg walks a fine line.

Lewis will probably get his $125 million. Some analysts would say he deserves it. He built Bank of America into a financial giant. To a large extent, the bank’s near-collapse was as much as part of the credit crisis as it was any decisions that he made.

That will not keep the public from believing that the deck is stacked against small shareholders and in the favor of rich CEOs.

Top Stocks blogger Douglas A. McIntyre is an editor at 24/7 Wall St.

Related articles:

Can China pass US in GDP?

IBM goes after Google

America's 500 largest companies

So long, Ken Lewis

Louis Navellier — Thu, 01 Oct 2009 18:42:00 GMT

Great news this week for shareholders of Bank of America (BAC). Ken Lewis will finally be leaving as chief executive.

Sorry, Kenny. Hate to see you go.

Bing: More on Ken Lewis

You want to know how happy BAC shareholders are? When the news hit the wires, the stock traded up in the after-hours market by about 1%. In other words, the bank is already worth $1.5 billion more without him!

As you can probably tell, I don't have a lot of sympathy for Mr. Lewis (I'll get to more on that in a bit). Back in April after a disastrous shareholder meeting, I wrote:

"BAC shareholders were plenty angry at today's meeting and demanded that the jobs of chairman and CEO be separate. Lewis held them both. Given this move, I doubt he'll hang around as CEO much longer. "

Pretty prescient on my part, no?

Well, I'd like to think so, but in reality, the writing's been on the wall for a long time for Mr. Lewis. The fact is, I've never trusted Ken Lewis. For one, Bank of America has consistently tried to massage its earnings. As an analyst, I can't stand that.

Last year, other banks were compensating their institutional clients for losses in their controversial high-yielding institutional money market funds, what did BofA do? They simply returned the illiquid securities to their clients.

Technically, mutual funds are allowed to do this, but BofA did it so they wouldn't have to disclose their losses. For BofA, it was more important to try and mask their losses rather than to take care of their clients.

In my opinion, Lewis seriously overpaid for Merrill Lynch. Add to that the fact that things got so bad for BofA that they went to the Treasury Department to be rescued. Twice! And the bank has been sued for the Merrill deal by the SEC. Perhaps that explains his, um, early retirement.

I'm not sure what the future holds for Bank of America, but a huge cloud has been lifted from over it. For now, I rate the bank a Hold. That means don't buy if you don't own it. However, if you do own it, there's no reason to sell right now.

At the time of publication, Louis Navellier held a position in Bank of America.

Related Articles:

Bank of America - One of the Top Trades for the Rest of the Year

Top 5 Stocks for October

10 High-Priced Stocks That Are Worth Every Penny

Banks asked for early payments

Kim Peterson — Tue, 29 Sep 2009 17:39:00 GMT

You think banks are strict about lending now? Wait until the FDIC gets done with them.

The Federal Deposit Insurance Corp. guarantees the deposits people make in its member banks to the tune of $250,000 per account. If a bank fails, customers can generally expect to get their money back.

Problem is that nearly 100 banks have failed this year alone, and hundreds more are expected to follow in the next few years. And the fund that insures customers' deposits is on its way to broke.

Bing: Is your bank next to fail?

So what's the FDIC to do? For one, start milking its member banks for more money.

It already asked banks to pay $5.6 billion through a special emergency fee this year, and chairman Sheila Bair doesn't really want to do that again. Adding more fees would send more banks down the road that ends in failure, which would necessitate more emergency fees, and so on.

So now the agency is asking banks to pre-pay some $45 billion in regular insurance premiums that it would normally pay from 2010 through 2012, the Associated Press reports. And when that money runs out, there's always a $500 billion credit line from Treasury that could be tapped.

At the end of June, the FDIC's insurance fund had about $10.4 billion in it. But at the rate things are going, that's not going to last long. Consider that the 95 banks that failed so far this year have cost the fund $25 billion.

The fund is supposed to total at least at 1.15% of all insured deposits, but now it's down to about 0.22%.

So banks will have to pay out more money to rescue each other's failures. That's not going to sit well with them, particularly as they are being asked to loosen up on lending to get more money flowing.

Related reading:

US large loan losses at $53 billion

Banks change rules on overdraft fees

YouTube credit card rebel gets results

Citi chief admits $100 million is too much

US large loan losses at $53 billion

Douglas McIntyre — Fri, 25 Sep 2009 10:43:00 GMT

The federal government’s Shared National Credit (SNC) review for this year found $53 billion in losses on large loans held by U.S. bank organizations, foreign bank organizations, and nonbanks such as securitization pools, hedge funds, insurance companies, and pension funds. The definition of a large loan is one exceeding $20 million.

The SNC said the $53 billion ”exceeded the combined loss of the previous eight SNC reviews and nearly tripled the previous high in 2002.” The study was first done in 1977.

Total credit commitments across the institutions reviewed was $2.9 trillion. The study looked at 8,955 credits extended to about 5,900 borrowers.

The results of the study are certainly an indication that many financial firms will have to raise more capital and that certain hedge funds and LBO operations may be in much deeper troubled that had previously been thought.

As Congress, the Treasury, and the Fed debate the issue of whether they have enough money in the TARP fund now and whether that fund should be maintained well into next year, this data should answer the question. The SNC numbers are not likely to get better next year as over-leveraged loans or loans made against assets which continue to deteriorate grow. The credit crunch which is supposed to be easing as each day passes may continue to be a problems among financial institutions for several quarters to come.

There is a great deal of optimism that the government will be able to withdraw its support of the broad U.S. banking system. It turns out that the process of that retreat should not even be in its earliest stages.

Top Stocks blogger Douglas A. McIntyre is an editor at 24/7 Wall St.

Related articles:

Biotech news

Apple information

Short selling data

2 banks change rules on overdraft fees

Teresa Mears — Wed, 23 Sep 2009 18:13:00 GMT

Here's a small victory for consumers:

Bank of America and JPMorgan Chase are planning to overhaul their debit card programs, changing the way they credit transactions and allowing customers to opt out of overdraft protection.

We'd like to think they're doing it because that's what the customers want, but they might have been just a teeny bit influenced by moves in Congress to crack down on overdraft fees.

Members of Congress have used words like "criminal" and "rip-off" to describe the practice of letting people overspend and then charging them fees without warning, The Washington Post reported. Customers are outraged that banks have raised fees, even as the government is investing vast sums to rescue the industry.

Bing: Avoiding bank overdraft fees

"People out there are getting whacked," said Sen. Christopher Dodd, who is drafting legislation that would require banks to get permission from customers rather than doing automatic overdrafts. "They should have the right to say, 'Deny me the transaction.' "

Overdraft fees are big business for banks and are expected to yield more than $38 million this year.

Overdrawing your account by a small amount of money, spread over several transactions, can cost hundreds of dollars in overdraft fees.

Rather than refuse to process a debit transaction when the account is out of money, banks approve it and then charge a hefty fee, $16 to $35 per transaction. That means an outing with six transactions could cost $210 in overdraft fees, even if you spent only a few dollars more than the amount in your account.

You might figure you could save yourself from these fees by telling the bank you don't want it to approve any transactions if you're overdrawn. But many banks don't allow you to do that.

And T at Savvy Frugality even had a problem with the bank processing the debit transactions first, charging fees and only afterward processing a paycheck deposit, even if the paycheck deposit happened first. When T protested, the charges were reversed, but T is still looking for a new bank.

Beginning Oct. 19, Bank of America customers will be able to opt out of overdraft protection, and new customers will be asked whether they want overdraft protection when they open their accounts.

Chase also plans to allow customers opt out of overdraft coverage. Plus, the bank says it will now credit bank transactions chronologically rather than debiting the highest amount in a day first. So if you make six transactions and only the last one overdraws your account, you'll be hit with only one overdraft fee. Currently, banks often debit the largest transaction first, which causes more of the day's transactions to incur overdraft fees.

Bank of America says it won't charge fees for overdrawing an account by less than $10 in one day and will charge a maximum of four overdraft fees per day, at $35 per overdraft. Chase will no longer charge fees when accounts are overdrawn by less than $5 and will cap the number of overdraft fees a day to three.

No word yet on whether other banks plan to follow suit.

While you're waiting for the new rules to take effect, or if you're at a bank that won't allow you to opt out of overdraft protection, be vigilant to save yourself from those hefty fees. If you think you've been charged unfairly, ask for a refund. You may get it. And, Flexo at Consumerism Commentary has 10 tips for avoiding overdraft fees.

Related reading:

Decline my debit card, please

5 big bills you can cut fast

10 things your bank won't tell you