With the European bank monkey off our backs, courtesy Deutsche Bank's (DB) pondering of a bond buyback, it's time to take a close scrutiny of what's ailing this part of our own stock market. Yep, the banks have been horrendous, and let me state the brief against them.
First, politics: You would think that eight years after the financial meltdown politicians would have something else to run against except the banks, but the Obama administration never did what it should have done, which is build meticulous cases against bankers that actually did things wrong. Sure, many just bet the wrong way. But there were individuals where cases could have been made and Justice took the easy way out and simply went after the shareholders with giant fines.
The public's anger reflects that, and both Trump and Sanders' victories last night confirm that. Sanders would break up the banks, which, honestly, at this point, given their discount to book value, would, ironically, be welcomed. It is not at all clear what Trump would do to them. Suffice it to say you wouldn't see a lot of them playing hole seven, the signature hole at Trump National in my native New Jersey.
My conclusion: more bluster than bark.
Second, given that JP Morgan (JPM), Goldman Sachs (GS), Citigroup (C), Action Alerts PLUS charity portfolio holding Bank of America (BAC) and Morgan Stanley (MS) all trade below book value, there must be a belief that it's not real. Frankly, I find this view fanciful. We have had five painful years of microscopic Comprehensive Capital Analysis and Review by the Federal Reserve, and there isn't anyone in the banking community who would have ever have dreamed that this level of scrutiny would have ever existed, let alone still be operative this long after the Great Recession. Most of these banks have been able to increase their payouts, which is a sign that the Fed does believe that the tangible book value is real.
So, perhaps -- Three -- people believe that book is prospective and it is about to collapse, perhaps significantly? What could do such a thing? There was a time when there was substantial litigation risk, but it is almost entirely behind them now. The $1.2 billion that Wells Fargo (WFC) just paid in federal fines last week for reckless lending may have been the last big holdout in this country that's now solved.
Sure, it is possible that the exposure to oil loans, which is about a couple of a percentage points for Bank of America and Wells Fargo, overstates what's current, but there have been charges taken and not all of these loans are going to go belly-up. What's more, amazingly, because these two banks have so much excess capital, they could afford to take the hit if they were all written down to zero. Bank of America literally trades as if every single bank loan should be written to zero -- and then some. Do the math. It should have stopped at $13.
Plus, just in case you think that oil and gas is destroying prospective book value, then what's the deal with Goldman Sachs and Morgan Stanley? They have almost no exposure whatsoever. But they are down huge, pretty much the exact same amounts as Bank of America. That's insane.
Okay, there is earnings risk and earnings are weak. A lot of that, though, is that they have too much capital and can't return enough of it because of the Fed rules. That's particularly the case with the totally beaten-down Bank of America, which has to wait until the June Fed review before it can hope to start the gigantic buyback it so very much needs.
Now, there are earnings stream issues; they do need higher rates. But they have all made a ton of money with lower ones, particularly Wells Fargo. There have been no IPOs or M&A to speak of. However, that doesn't corrupt book value, which is just cash on hand if you closed the darned place.
Now, contrast these with Europe. Many of their banks have only had one stress test. Many have never had to raise capital. Many have not settled yet with the feds for past mortgage indiscretions. Many have unseasoned CEOs. I don't know if any of them could even come roughly near the Comprehensive Capital Analysis Review that the Fed forces our banks through. The analogies just don't hold water.
This group has become the single most beaten-up group that shouldn't be beaten up -- as distinguished from oil, which isn't beaten up enough, and from tech, which still has more to fall. The Deutsche Bank prospective bond buyback may, at last, be the signal to trust the banks' book values, even if you don't trust the banking executive corps itself.