What a terrible week for the banks! First we had the nightmare of Wells Fargo (WFC) admitting that it bilked tens of thousands of customers through overly aggressive cross-selling. CEO John Stumpf came on Mad Money, apologized for the bank's actions and put the misdeeds in a multiyear perspective that was certainly a more positive spin than we have seen otherwise. But the stock fell every day this week, vastly underperforming a very bedraggled group.
Next week, Stumpf goes to Capitol Hill to answer questions about the bank's now-egregious cross-selling past, codified by both more than 5,000 firings and a wholesale change in the bank's incentive policy toward getting more business per customer. I am sure he will hear about the need to claw back bonuses that might have been based on hitting cross-selling targets. It will be ugly, so the stock, which we own for my charitable trust, could come under even more pressure next week.
Then we learned that retail sales for August fell 0.3%, quite a weak number, one that will encourage the doves and discourage the hawks when the Fed makes it rate decision next Wednesday. It's awfully hard to raise rates into a moment when the country's experiencing a spending slowdown.
Much of the move up in bank stocks from just a few weeks ago was based on a rate hike as soon as next week. That's because Fed Chair Janet Yellen pretty much endorsed that strategy just last month when the Fed met at Jackson Hole. The message was driven home further by Vice Chair Stanley Fischer in a CNBC interview, saying basically that we can't rule out two hikes for the rest of the year. So, the banks were ripe for a fall as the possibility of near-term increases had bank investors salivating. Looks like it was premature salivation.
Then we had the news about how the Justice Department is seeking $14 billion from Deutsche Bank (DB) for misdeeds involving the mortgage crisis that led up to and pretty much precipitated the Great Recession. The whole market capitalization of Deutsche Bank is only $18 billion, so paying $14 billion would be, how do you say, a bit of a hardship. But Deutsche Bank's public rebuff of the claim seems ill-advised. The Justice Department historically doesn't care for the bargaining over fines being done in the press.
I totally get that Deutsche Bank, which was integral in creating some of the more arcane products that made the mortgage crisis so hard to solve, wants to avoid paying the fine and thinks it is outlandish. But so did Bank of America (BAC) , JPMorgan (JPM) and Citigroup (C) and then ended up paying $16.65 billion, $13 billion and $7 billion, respectively, to Justice to resolve their legal situations. I wonder what Deutsche Bank is thinking because, unlike the huge American banks, the repercussions of going after Deutsche hard aren't as great. It doesn't employ that many people relative to the other companies. I can't help but wonder if Wells Fargo thought it was getting off lightly with its $185 million in fines paid, and misjudged the public outcry and the possibility of Justice going after it, too, for wrongdoing, something that we heard rumored later in the week. (Citigroup is part of TheStreet's Action Alerts PLUS portfolio.)
Altogether, it feels like bank Armageddon not long after bank heaven. I say if you own these, just let it play out. Higher rates will come and they will boost the bottom line. In the meantime, the pain doesn't seem to be done so anyone who is not yet into the group, I think a better entry point awaits so no need buy the first dip after a big rate-increase-induced hope that now looks like it's not going to come as soon as next week as some, including me after Jackson Hole, expected.