Don’t Buy Into Big Banks’ Hooey

Bad behavior is not excused by populist remedies

By Marc Bastow, InvestorPlace Assistant Editor

While working my way through some papers and information researching what turned out to be a story that wasn’t about banking, I came across this from The Wall Street Journal’s Monica Langley and Dan Fitzpatrick:

“J.P. Morgan Chase & Co. plans to reclaim millions of dollars in stock from executives at the center of the trading blunder that shocked Wall Street and tarnished the reputation of Chief Executive James Dimon. The nation’s biggest bank is expected to claw back compensation from individuals including Ina Drew, who ran the company’s Chief Investment Office, or CIO, according to people familiar with the bank’s plans.”

3 Stocks That Always Go Up
3 Stocks That Always Go Up

And so ends the tale, I guess, of a possible $5 billion bungle by the banking company that supposedly sets the bar for the industry, JPMorgan Chase (NYSE:JPM).

What was the reaction of investors to the public relations populist mantra of “Off With Their Heads?”

They actually bought the stock, as if nothing has happened. In fact, the entire big-banking sector — including Bank of America (NYSE:BAC), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) — was on the rise for a bit thereafter, although the group has given some back since. JPMorgan also was set to open Friday up a couple percent on its latest earnings, with the trading loss apparently more than baked in.

And year-to-date, all but Citigroup are in the black, with BAC and WFC up a respective 35% and 20%.

People, people, people. Have we not learned a lesson? Forget about “Too Big to Fail” mentality. What we have here in the banking industry is “Too Big to Care.”

The four biggest banks in the country, listed above, represent total deposits that exceed the combined deposits of the next 48 biggest banks in the country.

Let that sink in.

An industry with that type of concentrated power and size answers to no one; not a Congress that attempts through legislation to find regulatory restraint from unnecessary risks that threaten the system; not investors who watch as companies fight lawsuits brought on behalf of homeowners tossed out of their homes because a robo-signing automatron has no idea, much less paperwork, to back up false claims; and not individuals or companies or even cities that might have been cheated out of better loan rates because of a Libor-fixing scandal that I can pretty much assure you will travel across the Atlantic to the shores of U.S. banks.

“Clawing back” $5 billion in losses in the form of giving back stock? What kind of stock? Out-of-the money or unexercised options due to expire in 2014? At today’s prices, someone needs to cough up enough money to buy 119 million shares to cover the costs. Less brokerage fees, of course.

I admire Jamie Dimon, I really do. So much so that I had an inkling to buy lots of shares when he left Citigroup and went to Bank One in Ohio, and more recently when he took charge at JPM.

But I didn’t.

In fact, I no longer own any bank stocks because although I acknowledge that not only do we need a banking system, but they are here for the very, very long term, I still believe the worst is possible.

Banks can’t — and at this point won’t — come clean on portfolio losses for a long time because the market can’t absorb the possibility that some of these banks are in some deep doo-doo.

The Fed’s “stress tests” notwithstanding, we still don’t know how well these titans might weather bumps or potholes in the road like student debt, foreign currency debt, commercial real estate debt, or hidden “hedging” strategy debt bombs.

My money won’t find out, and given the level of mistrust in the system, I’m not really sure why investors sink their monies into the sector except to find regional gems like U.S. Bancorp (NYSE:USB), Regions Financial (NYSE:RF) and SunTrust (NYSE:STI) — all of whom have performed very well indeed over the last 6 months.

My advice? Look beyond the “Too Big to Care” crowd and toward the “Small Enough to Thrive” banks.

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

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