The recent tirade by JPMorgan (NYSE:JPM) CEO Jamie Dimon at the expense of Bank of Canada Governor Mark Carney underscores the reasons why you might want to reconsider your investment in America’s second-largest bank. Dimon’s ego is starting to run amok, and shareholders eventually will pay for his angry outbursts.
Those willing to consider his reign as “Super Banker” might be done should consider selling JPMorgan and buying KeyCorp (NYSE:KEY) instead. Here’s why:
Where There’s Smoke, There’s Fire
Two news headlines highlight the need for extreme caution when investing in banks of any kind, American or otherwise. The first are the 17 lawsuits filed by the Federal Housing Finance Agency on behalf of Fannie Mae and Freddie Mac. The agency is looking to recoup $196 billion in mortgage-backed securities bought by the two government-sponsored organizations. The FHRA contends that the 17 banks knowingly sold unsound mortgages. Among the group is JPMorgan, which sold $33 billion to Fannie Mae and Freddie Mac.
The bankers, not surprisingly, are adamant that these claims are without merit. That’s possible. It’s also possible that in their quest for revenue they said and did anything to make the sale.
For instance, a Merrill Lynch affiliate claimed that none of its mortgages were “under water” when in fact 20% of those sold as part of a mortgage-backed security had loan-to-value ratios of 100% or more. Fannie Mae and Freddie Mac bought $24.8 billion in mortgage-backed securities from Merrill Lynch, so it’s reasonable to wonder what percentage of the $33 billion JPMorgan sold also was under water. We will find out soon enough.
Paul Millar, Managing Director of FBR Capital Markets, suggests JPMorgan and other large banks could be on the hook for $25 billion in potential costs should the Federal Housing Authority reject its insurance claims on bad loans. The FHA believes those servicing loans, as well as lenders themselves, made serious procedural mistakes when arranging mortgage insurance. If so, the FHA would be under no obligation to meet those claims, costing the banks billions.
To me, this clearly is another example of banker ego running wildly out of control. Given the smoke billowing from JPMorgan’s headquarters, the fire is sure to be there somewhere.
In early September, Jes Staley, JPMorgan’s Chief Executive of Investment Banking, reiterated that it wouldn’t be making any job cuts, unlike many of its peers. Over the summer and into the fall, close to 100,000 job losses have come from the top 50 banks in America. While for some they’re probably reassuring words, the truth is Staley knows it’s false bravado.
In the first half of 2011, JPMorgan generated 12%, or $2.7 billion, less in net interest income over the same period last year. Staley went on to suggest the investment banking division, his operation, would deliver 30% less revenue in the third quarter. At the same time, expenses likely would continue to rise. The clear casualty from all of this is earnings. JPMorgan is trading at a 52-week low because future earnings appear bleak. Having a CEO with an out-of-control ego only makes matters worse.
A much better alternative given bank stocks are looking stuck in the mud for the next year or more is Cleveland-based KeyCorp (NYSE:KEY), a serious takeover target, according to Jonathan Kate of the SmallCap Network. Trading at or near a 52-week low, its stock is down close to 40% since KeyCorp appointed a new CEO in November 2010, yet its financial situation during this time has gotten better. Yates believes the drop in price — combined with operating and profit margins better than many banks, including JPMorgan — makes it vulnerable.
During the summer, Capital One (NYSE:COF) paid $9 billion to acquire ING Direct and its $81.6 billion in deposits. ING Group was motivated to sell, giving Capital One the opportunity to add market share at a relatively good price. I’m not sure KeyCorp management would be nearly as eager. Therefore, based on the ING deal and KeyCorp’s $60 billion in deposits, it seems to me that any takeover would be at least $7 per share, possibly as high as $10.
Bank stocks right now are dead money. If you are a JPMorgan shareholder, you might want to consider KeyCorp or another of the regional banks. That’s where the action is.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.