Panic Selling in Financials Was Just That: Panic

by Marc Bastow | November 9, 2012 11:45 am

Panic Selling in Financials Was Just That: Panic

Financial stocks were one of the biggest knee-jerk losers of Election Day — at least judging from Wednesday’s massive selloff of “too big to fail” giants JPMorgan Chase (NYSE:JPM[1]), Bank of America (NYSE:BAC[2]), Morgan Stanley (NYSE:MS[3]) and others.

Most of this gang had stabilized a tad by Thursday, but in my mind, the message sent after Election Day was odd: Combine an Obama re-election with Elizabeth Warren’s senatorial election in Massachusetts[4], and you get a more muscly administration ready to enforce financial legislation, not watch lobbyists chip away at the rules.

And the result is that, suddenly, financials aren’t worth as much as they were the day before?

Seriously?

Maybe I’m the only one astonished at this cynicism, which suggests that the financial behemoths that can bring the nation’s — nay, the world’s — economy to its knees can only thrive if they’re unburdened by some much-needed regulation?

You mean to tell me their structural models don’t hold up with greater capital requirements, or perhaps a bit less opaque trading for their own accounts?

Come on.

The banking sector has rebounded spectacularly this year, with names like Citigroup (NYSE:C[5]) and Goldman Sachs (NYSE:GS[6]) posting 30%-plus returns, and Bank of America scorching them all with 70% year-to-date gains. As a whole, if you’re a big financial institution in America, chances are you’re beating the market.

I find it hard to believe people would’ve piled back into financial stocks the way they did if they were all that concerned about current regulations weighing stocks down. Investors even started buying JPM again after the fallout of the “London Whale” debacle[7], which certainly got the regulatory harpies squawking.

If investors thought these stocks hadn’t at least tidied up corporate balance sheets and winnowed down loan loss provisions — which they have, by the way — they wouldn’t have come crawling back throughout the year. Regulatory concerns just didn’t appear to be driving investor activity.

At least not until Wednesday.

It scares me to think that bank stocks’ gains are only a function of investors hoping Dodd-Frank would be watered down into a briny joke — and now that the possibility exists that the administration might fight back, the sector is somehow rendered incapable of producing sound profits.

It just ain’t so! JPMorgan and Wells Fargo (NYSE:WFC[8]) significantly grew third-quarter earnings this year. Backing out huge losses as it exits┬áMorgan Stanley Smith Barney, Citigroup grew its profits, too. Bank of America only broke even, but that still pleased analysts that thought the company would lose 7 cents per share.

Let’s face it: Banks have managed to do very nicely in spite of Dodd-Frank rules and regulations, and there is no reason to believe that won’t continue.

So let’s call a bit of a truce on this one, shall we?

Demonizing the banking industry as cold-hearted lenders seeking to bring down the world economy while repossessing your house is a little overblown and played out. On the other hand, thinking government bureaucrats — in the name of consumer protection — are systematically destroying the system via regulation is lunacy, too.

Those on the fringes should realize the truth is much closer to the center. Life under an enforced Dodd-Frank won’t be easy for the big banks, but it won’t keep them from making a buck, either.

Like the republic after Tuesday, the industry will survive.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities.

Endnotes:
  1. JPM: http://studio-5.financialcontent.com/investplace/quote?Symbol=JPM
  2. BAC: http://studio-5.financialcontent.com/investplace/quote?Symbol=BAC
  3. MS: http://studio-5.financialcontent.com/investplace/quote?Symbol=MS
  4. Elizabeth Warren’s senatorial election in Massachusetts: http://slant.investorplace.com/2012/11/watch-out-wall-street-elizabeth-warren-is-coming/
  5. C: http://studio-5.financialcontent.com/investplace/quote?Symbol=C
  6. GS: http://studio-5.financialcontent.com/investplace/quote?Symbol=GS
  7. the fallout of the “London Whale” debacle: http://investorplace.com/2012/07/bad-bad-banks-a-spate-of-sinful-behavior/
  8. WFC: http://studio-5.financialcontent.com/investplace/quote?Symbol=WFC

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