Raiding the Most Hated Industry in America

The big four, JP Morgan, Bank of America, Citigroup and Wells Fargo, are under fire again with renewed scrutiny and pressure to break up.

Taxpayers who initially propped up these financial institutions in 2008 with a $700bn bailout are concerned that they’ll be on the hook once again if the underlying problems continuing to plague the industry remain unresolved.

So what’s snapped the issue back from the dead?

Well, we’re entering the U.S. presidential cycle. Regulatory needs in banking will likely come back in focus and play a part in the debates going forward, even if nothing material comes of it right away.

Generally speaking, we tend to find motivation in times of crisis.

And we’re not in panic mode, yet…

But one thing we do know is that there remains a high level of operational risk. It seems “too big to fail” has morphed into “too big to behave and manage”.

These big banks have paid enormous sums of money to settle accusations of manipulating interest, foreign exchange and commodity rates.

And it probably wouldn’t surprise you to know there have been charges in relation to money laundering and erroneous foreclosures as well.

What part of this historical behavior would lead us to believe that the biggest banks would respect meaningful regulation and act in an ethical manner going forward?

On the topic of industry consolidation, they’ve even tried to justify their immense size arguing “economies of scale” and claiming that greater efficiencies could be passed all down to the consumer.

One former chief executive banker even had this to say, “The consolidation that took place was driven by the market’s needs and represented an evolution toward greater efficiency in banking.”

We were never really told what the market needs or benefits were.

More recently, the expense ratio of these giants came in at 3.04% of average assets versus 3.28% for the next 80+ largest banks following the big four mentioned earlier in the article.

Unfortunately, the marginal benefit went directly into the pockets of bank executives and those in positions of influence within these companies.

How do we know this?

Aside from the research and reporting done we know that personnel expense came in at 1.52% of average assets compared to only 1.43% for the group of smaller banks.

So much for trickle down…

But before going on a witch hunt, we have to look at the conditions in the system itself responsible for steering these behaviors, and arguably our economy, off course.

The Gramm–Leach–Bliley Act (GLBA), also known as the Financial Services Modernization Act of 1999, removed barriers in the market and allowed commercial banks, investment banks, securities firms, and insurance companies to consolidate.

It also failed to give to the SEC or any other financial regulatory agency the authority to regulate large investment bank holding companies.

It was the Depression-era Glass–Steagall Act of 1933 killer.

What could possibly go wrong with a change in policy that had served the industry well for so long?

As we would soon discover, too much misguided incentive and risk (think derivatives) were injected into a system up and beyond what government should be insuring when it came to protecting consumer bank deposits.

Due to the financial crisis that hit equity markets hardest in 2008, banks are now required to hold an increased percentage of capital on hand, a level that effectively puts a good dent into the advantages realized through economies of scale.

Instead, increased capital requirements make it more difficult for any person or business to acquire a loan, even for those considered to be low-risk borrowers.

The pendulum of lending swings from one extreme to the other instead of finding some sort of responsible middle ground. And that’s a direct body blow to any economy with a heavy financial services footprint trying to get on its feet again.

That’s the worst of it and I’m sure big banking has you down and out on the industry right now if you weren’t there already.

Yet despite all this concern and uncertainty, there are profits to be had.

And the banking heavyweights absolutely hate it you invest in their competitors.

We’ll call it the “bailout revenge.”

I’m talking about growing regional banks in a position of financial strength that provide opportunities for investors as we speak.

In fact, members of our trading service, Reflex Momentum Report are currently up almost 25% since our top “under the radar” banking stock was triggered back in May of this year.

And the best part is that our system’s target price is even higher than current price levels for the stock.

That’s what happens when you marry ideas of fundamental quality with market timing.

So when the Dow fell from its high of 18,351.36 to a low of 15.370.33 (-16.24%) over the summer, results like the above play become that much more special.

With that said, it’s important to remember that in a tough market it’s not enough to simply avoid investment losses. Dead money locked into trades going nowhere can also chew into wealth building efforts.

Good investing,
Reflex Investor

P.S. Check out our comprehensive financial newsletter, Reflex Momentum Report. It uncovers “under the radar” investment opportunities, marrying fundamental quality with critically important technical timing to enhance potential returns.

Close Menu