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.

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US Banks Need Big Political Bargain $XLF, $C, $WFC, $JPM, $BAC

It’s about five years since the 2008 melt-down and Washington is still prosecuting and bringing new charges against banks for their roles in mortgage-backed securities. The Banks need to make a Big Political Bargain and call the Federal dogs off. Fines are in the hundreds of millions. Costs of litigation and senior level distraction are in the tens of millions. The banks need to staunch this flow and look to the future.

The government needs to realize the banking sector is the aircraft carrier of the economy. Must be protected at all costs. So stop with the lawsuits regardless of ideological justification.

Obama has three more years. Republicans can’t win the White House without better Latino support in three years. Three years plus of litigation can be a long time.

So make a deal banks. This has to be business and not personal. Someone needs to be able to have the right lunch with Senator Elizabeth Warren and lay the ground work for the next ten years. Not fight rear guard actions because of the past ten years.

George Gutowski writes from a Caveat Emptor Perspective.

Which Board is Better? JPMorgan or Wells Fargo $JPM $WFC $XLF

I recently blogged about the boards of JP Morgan (NYSE:JPM) and Wells Fargo (NYSE:WFC). Here are a few comparisons.

JPM has ten independent directors. WFC has fifteen.

Average Age at JPM 62. At WFC 64

Average length holding board seat at JPM 7.3. At WFC 9.5

At JPM 60% of directors have been there for 8 years or more.

At WFC 53% if directors have been there for 8 years or more. 5 have been there over 15 years. Potential for renewal is greatest.

At JPM only one women on board. At WFC 5 women on board.

The most striking difference between the two boards is the political and regulatory backgrounds. WFC has two former federal cabinet secretaries and two individuals who were on local boards within the Fed Reserve System. As well many of the other members come from regulated industries.

At JPM no former high level politicians, no former members of the Fed Reserve local structure and precious little regulatory experience.

JP Morgan had the London Whale and a marque CEO lipping off at central bankers.

The director`s background has created a different culture. Just the sheer weight of more voices mitigates some risk. WFC has long been placing women on the board. Controversial as it may seem, if women bring an advantage than WFC has it more than covered. JPM is nowhere on this point.

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.

Warren Buffett says JP Morgan Doing Right Things Why Did He Need To Say That?? $JPM $BAC $WFC

English: Category:JPMorgan Chase

English: Category:JPMorgan Chase (Photo credit: Wikipedia)

JP Morgan (NYSE:JPM) finally fessed up to the market and disclosed that the trading losses were $5.8 Billion. Long ways away from the $2 Billion they first came out with. What was that a working number or something?  The stock traded higher today supposedly in relief the number is not bigger.

The question becomes how the risk compliance culture will change to adapt to the very expensive lessons that JP Morgan has just paid for.

Warren Buffett claims that JP Morgan is doing all the right things. Closing the barn door after the horses have bolted for god know where, if you ask me. you have to ask yourself why did Warren Buffett feel a need to opine. does he have insider information. Probably not. But his opinion does hold sway and he does have a big hunk of Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC). The banks are inextricably linked together. So by throwing in his two cents on JP Morgan he is helping out his other two investments.

But Warren, really why did you have to go public and stay stuff. No one is doubting your acumen. Your deals with Wells Fargo and Bank of America should pay big in time. So you must have a short-term reason?

Just wondering.

George Gutowski writes from a caveat emptor persepctive.

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.

Tricks no treat for Banks & Financials $XLF $C $BAC $WFC $GS $MS $JPM

Members of the Committee on Financial Services...

Image via Wikipedia

Expect the bank and financial stocks to be politically battered for the next year as politicians say nothing but  stupid stuff about the economy. Obama‘s not so secret second term agenda is a return to the Glass Steagall format. Crazy risks not to be underwritten by the citizens of the United States.

How to pick winners in the financial sector? Look at how well banks and financials are transitioning to the new regulatory format. They all know it’s coming. Just look at what is happening at the “Prop Desks”

Disclosure: George Gutowski writes from a caveat emptor perspective. I personally view a return to a Glass Steagall environment as a good thing. I do not hold any positions in stocks mentioned in this post. I do not have plans to initate new positions within the next 72 hours. But I am watching the sector like a hungry dog looking through a butchers window. I like my meat aged nicely.