As expected financial stocks soared today based upon a government plan to buy toxic assets from financial companies. Bank of America (BAC) is up to $7.80 a share. Just two weeks ago the stock was at $2.53 amid fears of nationalization. I still believe that Ken Lewis is in trouble but Bank of America will be okay as long as the stock can stay above $5. B of A has some very profitable businesses and should post solid numbers in an economic recovery. JPMorgan Chase rose $5 today to $28.86 per share. Wells Fargo (WFC) jumped 24% to rise above $17 for the first time in awhile. Even though these stocks have rallied over the past two weeks, many of them are still down over 80% over the past year. While I wouldn’t jump in and buy a ton of shares at their current prices; I would be a buyer on any pullback of 10% or more. I have been buying shares of Wells Fargo monthly.
Bank Stocks May Finally Be A Bargain
The US Treasury is finally set to unveil its plan to buy toxic assets from banks. The public private partnership is expected to buy up to 1 trillion dollars in bank assets. The government hopes to entice private investors with guarantees and offering low interest loans to remove toxic assets from bank balance sheets. The government will share the risk if the toxic assets continue to decline in value. If these assets are removed from bank balance sheets without additional government ownership then the major banks should see their share prices increase substantially.
The Public-Private Investment Program should benefit Bank of America, Citigroup, JPMorgan Chase and Wells Fargo the most. These are 4 of the largest banks in the country and have balance sheets riddled with toxic assets. The 1 trillion dollar plan should help alleviate some of the problems facing these banking giants. All of the assets that are currently deemed as bad assets are not such and will have some value in the future. If the government holds these assets until the economy improves then the stock prices of the major banks should rise over a time. It may take a few years to see a significant rebound in price but with a plan finally in place the financial sector should improve. I have been a buyer of Wells Fargo, Bank of America and JPMorgan Chase at these distressed prices.
I don’t know if 1 trillion is enough to remove all of the bad assets from the balance sheets of banks but it is a good start.
Banks Halting Foreclosures
It appears that something good will come out of the Congressional hearing that the House of Representatives held with bank executives. JP Morgan Chase is joining Citigroup as one of the few ”superbanks” that are halting foreclosures temporarily. JPMorgan will be suspending foreclosures until March 6th and Citigroup will halt foreclosures until March 12th. This plan has been announced after bank CEO’s received a grilling from Congress over their use of TARP funds, excessive compensation practices and unfriendly business practices. They were strongly urged by Congress to halt foreclosure proceedings until after the Treasury announces its new plan to help homeowners.
The Federal government is working on a 50 billion dollar plan that would help to stem the tide of rising foreclosures and hopefully bring a bottom to plummeting real estate prices. The government is considering using subsidies to help homeowners make mortgage payments. I think that this is a start but it will take much more than 50 billion to solve this crisis. Ultimately the government will need to get the banks and investors to cut the principal on some of these loans. Loan modifications are the only way that I see to solving the foreclosure crisis. CDO’s and mortgage backed securities have complicated things because you may have a bunch of different investors that have a stake in the same properties.
If a family is living in a house that has a $500,000 mortgage and the house is only worth $350,000; there is no motivation for the family to continue to pay the mortgage. Often the family will just walk away leaving the bank with another home to auction off. The government needs to let banks know that it is better to get something than nothing. Earning $350,000 from the house is better than to auction it off and get much less. Government subsidies will help and should be a part of the plan but a reduction in principal will help even more. A temporary cap on adjustable rate mortgage interest rates and new home buying incentives will help us to start to clean up this mess.
Photo by respres
Banking Woes
The whole banking sector is bleeding. Bank of America(BAC) has finally hit the single digits on news that the banking giant needs additional capital. Bank of America is dealing with huge write downs from the Merrill Lynch acquisition. Citigroup is trading at $4 and could easily be headed to zero. I wrote a post a while back that Citigroup’s only hope for survival was as a much smaller entity whose primary function is as a commercial bank. Citigroup finally realized this and is selling off assets including the majority of their Smith Barney stake to Morgan Stanley.
My guess is that these aren’t the only major banks that will need more government funds. Wells Fargo, JPMorgan Chase, PNC Bank and even US Bancorp may need additional TARP money. The more capital that these banks borrow, the more that it dilutes shareholders equity stakes. Who knows if Morgan Stanley has enough liquidity to survive and they just purchased Smith Barney? Can anyone say without a doubt that Goldman Sachs will not need more assistance from the government?
My positions page will always show that I hold shares in Bank of America, JPMorgan Chase and Wells Fargo because I have physical stock certificates of these companies. I sold the major portion of my bank stocks because I felt they still had significant room to drop. I have never liked Citigroup as an investment. I still believe that Wells Fargo, US Bancorp and JP Morgan will be profitable long term. Bank of America worries me because they are adopting a business model that is eerily similar to Citigroup. Bank of America has a lot riding on the Countrywide and Merrill Lynch acquisitions.
Economists estimate that the banking industry is only halfway through asset write downs. Banks may need to write off 1 trillion dollars more of losses. Banks are facing increasing home loan losses, rising credit card delinquencies and growing commercial loan defaults. As job losses continue to mount they only add to the pressure on bank earnings.
Bank stocks will continue to be under pressure in the near term. No one has a clue as to what bank earnings will look like for the next year. Citigroup is expected to report a 10 billion dollar loss for the 4th quarter alone. That is incredible. I have to admit that this financial crisis is far worse than I originally thought. I expect that dividends will be eliminated and stock prices will easily take out their 52 week lows set in November. Some banks will hold up better than others but the industry as a whole is not pretty.
Photo by woodleywonderworks
