Mortgage Fines Reveal Board Room Stupidity at $BAC and $JPM, $C, $WFC, $XLF

We all knew billion dollar fines were coming. We now know that they are just speeding tickets. Bank of America, Wells Fargo, JPMorgan and others thought they were getting strategic assets at bargain basement levels. Turns out take-overs were not worth it. Big money spent should have been kept inside. Billion dollar fines will always be a bad use of capital.

The banks will survive because they are too large to fail.

However  you have to ask “How smart was that board of directors to buy a pig in a poke” what will they do next time. What grand strategy will they have.

Banks are the most difficult investments to analyze. So you decide to follow good management. Except you cannot find good management. When they had the chance they bought crap.

George Gutowski writes from a caveat emptor perspective.

Google Replaces Financials Too Busy with Complex Derivatives $GOOG $XLF $C $WFC $BAC $JPM

Image representing Google as depicted in Crunc...

Image via CrunchBase

Google announced they are buying car loan securitized debt as they try to improve miniscule cash yields. OK not that impressed with non technology initiatives. But while we are calling the kettle black what this means is the traditional investors in securitized debt are no-show.

Are they too busy with complex derivatives that could explode any minute?

Are they too illiquid and could not take part? (Call Bernanke to verify)

Are they savvy enough to take a pass because they have had a snootful of securitized problems and just do not want to see anymore? Was there a back channel phone call to Fed before the deal?

Anyway Google is now a new candidate for XLF the financial index.

George Gutowski writes from a caveat emptor perspective.

Citigroup Still Has Leash and Collar $C $XLF


Citigroup (Photo credit: Wikipedia)

Citigroup (NYSE:C) announced improved numbers and long-suffering investors some may say speculators were encouraged. Most financials such as Wells Fargo (NYSE:WFC) and JPMorgan (NYSE:JPM) as well as Citi seem to have the same mantra. Improving economy, reducing loan loss provisions and even pray tell some reversals where yesterdays red ink turns miraculously black. You have to love bank accounting.

The key difference for Citigroup was recognized by the CEO Vikran Pandit very early in his prepared remarks. Fed Reserve still decides the major issues. It sounds like the Fed will decide what are the major issues before they tip their hand. So as an investor you have to say thanks for the honesty when Vikran Pandit describes at length something he calls the CR Process. He continues to describe that Citi has to resubmit a capital plan to the Fed. Only a few paragraphs preceding he laid out where Citi was with the Basel ratios and everything seems lovely.

If you are re-submitting plans to the Fed things are not lovely. In fact you have been kept in after school so that teacher can pay special attention to your particular circumstances. in many ways you should say thank you but clearly the other banks running around the financial school yard are having way more fun and so are their shareholders. While we can only speculate about the Feds response Vikram Pandit is telling one and all that the Fed will respond just shortly before the end of their Q3. So basically he gets two more earnings announcements with the thousand pound gorilla sitting in the room sipping your best scotch.

So investors wishing to maximize wealth need to aware of the real back room power than the Fed has. All this before you consider the puny dividend yield which the Fed is probably restraining for now as well as the classic problem all banks and financial institutions have when interest rates start to rise that of managing interest rate margins as your cost of funds increases and borrowers attempt to go long and lock in the cheap rates.

George Gutowski writes from a caveat emptor perspective.

JP Morgan & Wells Fargo Set Tone. Except No One Thinks About Rising Interest Rates or Margin Compression $JPM $WFC $XLF

Interest Rates

Interest Rates (Photo credit: 401K)

Everyone is applauding JP Morgan (NYSE:JPM) and Wells Fargo (NYSE:WFC) about their Q1 numbers. Red ink has turned black in many categories. Much improvement has been experienced in credit loss reserves. It’s always nice when you stop losing money because your customers are now able to meet their obligations. Not exactly genius more in the fundamental must have category. So if you believe the economy is improving as both sets of executives maintain you will see gradually improving fundamentals. Wells Fargo even went so far as to say that loans and mortgages taken on now in the early stages of the recovery have less risk than loans and mortgages taken on in the latter stages of the economic cycle [some would say bubble]. Hard to argue so far.

But think in terms of game changers. Nothing ever goes in a straight line. Financial institutions live and die by their ability to maintain adequate net spread. That is the difference between what funds cost and what they can charge their clients who can meet their obligations. Interest rates are at historically low levels. Yield oriented depositors and investors are only too aware of the pain and suffering low-interest rates have exacted.

The market dynamic in a rising interest environment will be for borrowers to attempt to lock in long while providers of funds in whatever form will attempt to stay short and lock in better rates higher up the cycle. This happens every time. Also while the credit risk seems to be improving as loans and mortgages increase in cost a lot of underwriting starts to fall apart. most consumers will struggle with an extra three percent cost on their mortgage.

We may already be seeing the beginnings of margin compression. Concern has been raised about JP Morgans increased cost of long-term debt which would be provided by bond investors who should be the smartest guys in the room when it comes to interest rates.

Do not be lulled into a false sense of security with the two supposed better names in the banking sector. They will all experience the same challenges of margin compression. It happens with every increase in the interest rate cycle. So far management is whistling through the grave yard and not speaking about it.

Iceberg straight ahead!

George Gutowski writes from a caveat emptor perspective.

Citi misses, disappoints, confounds, annoys, fumbles, enrages and fiddles loss reserves. $C

English: Vikram Pandit, Chief Executive Office...

Image via Wikipedia

Citigroup (NYSE:C) may become the world record holder for manic-depressive value plays. There is a school that continues to believe there’s a pony in here somewhere. We know there is, we can sort of smell it.

In the meantime Vikram Pandit, Citi’s Chief Executive Officer, said, “Overall, we made solid progress in 2011.”…..”Clearly, the macro environment has impacted the capital markets and we will continue to right-size our businesses to match the environment.”

Ok so  we have the classic mixed message conundrum. The macro situation stinks. Everyone gets that except Euro bureaucrats and labour unions. Citi will be firing thousands more to cut head count and right size operations. But at the same time Citi is reversing loan and credit loss provisions and boasting income. That only happens when the economy is getting better. Thats when the macro situation has improved and looks good.

Citi’s numbers really stink when you back out credit loss reversals. No one was expecting Citi to come in with flying colours. Financial institutions (NYSE:XLF) are still hurtin real bad. But me thinks the pony may have drowned in too much BS.

Citigroup still needs to find a path for the future. Right now they do not have the foggiest notion. Watch for more bold moves. It will be difficult to separate the desperate from the strategically brilliant.

George Gutowski writes from a caveat emptor perspective.

Abandon hope on financial stocks Obama needs the punching bag. $XLF $C $BAC $WFC $MS $JPM $GS

Good Lordy Wall Street

Image by mediafury via Flickr

Financial stocks have destroyed not created wealth in recent memory. The sickness of the financial system is akin to having cancer of the blood. Bank management has a unique opportunity. They can go through any blood-letting and surgery to repair themselves and position for the future.

No one expects good things. Obama will continue to make throw away political comments about Wall Street. Headline risk and political risk abound. So get the scalpels out and do what you gotta do. Because if you believe in the future, and really what choice do you have, the next cycle will belong to the strong and prepared. If you are still squawking about yesterdays issues you will fall too far behind.

Assess banks on what they are doing to prepare for the future, not by the current political paralysis.

Disclosure: George Gutowski writes from a caveat emptor perspective. I hold no positions in any stocks mentioned in this post. It really is way to early. I have no plans to initiate new positions within the next 72 hours.

Citigroup Fake Dividend Signal


Image via Wikipedia

Citigroup (NYSE:C)) announced a reverse stock split. We have all been waiting for it. The question was when not if. The stock does trade below $5 and that causes optical problems on institutional investor balance sheets.

But the one cent dividend is the quintessential signal that Citigroup is just not ready. Yield oriented investors will snicker. The only advantage is that Citigroup can now trumpet that they have paid dividends for several more quarters. Eventually they can paint the investor relations mosaic and make it sound like dividends have poured off Citigroup for a long time. Memories are short. Investor Relations stratagem’s are clever.

The Wall Street giant is awakening. But they wanted the dividend re-introduction story out-of-the-way. Watch carefully.

Disclosure: “George Gutowski” writes from a  “Caveat Emptor Perspective”. I hold no positions in stocks mentioned in this post. I have no plans to initiate new positions within the next 72 hours.