You Simply Can’t Trust Bank Stocks

Bank stocks have been doing pretty well lately, all told. In the past 12 months, JPMorgan Chase (JPM) is up 22% vs. about 12% for the S&P 500 index. Wells Fargo (WFC) and Citigroup (C) have both also outperformed the stock market in the same period.

bank stocks

But despite decent performance of bank stocks, both in regards to their share price and in regards to recent earnings with a 6.9% rise in Q1 profits, investors simply cannot trust financials right now.

The $6 billion in recent fines levied at a “cartel” of banks last week for manipulating currency markets to take advantage of small-time investors is only the most recent example of bank stocks behaving badly. That judgment is the latest among $184 billion in total fines paid by major financial institutions from 2009 through the end of 2014, with a staggering 174 cases still pending as of late last year!

And by the way, those fines are clearly not working as a deterrent to big bank stocks, either.

Bank Stocks Shrug Off Fines, Regulations

“In this case, the amounts that the banks were fined are trivial. The total fines, imposed for many years of criminal acts, represent one tenth of a percent of the daily volume of the forex market,” said Philip Nichols, professor of legal studies and business ethics at the Wharton School of Business.

What’s worse, as Matt Levine notes in a recent Bloomberg column, recent client letters from major banks involved in the forex mess, including Barclays (BCS) and JPMorgan, have actually used court-mandated disclosure notices to clients as a way to point out these kinds of shenanigans are going to keep happening.

“There is no promise of reform here: The Justice Department caught the banks doing things that it didn’t like and fined them billions of dollars, but won’t stop them from doing most of those things,” Levine writes.

What’s amazing is that the Justice Department and regulators actually were able to bring a case against the bank considering this era of weak enforcement. And it’s about to get worse, with legislators looking to dismantle crisis-era protections brought about by Dodd-Frank … but quietly doing so under the guise of a bipartisan trade accord, where nobody will notice.

Heck, even the minimum amount of disclosures and oversight bank stocks have to abide by are a joke. Consider that a financial sector analyst at Deutsche Bank with more than two decades of experience recently wrote a damning critique of the sector’s habit of opacity and confusing filings. He writes the process of bank disclosure “has become so complex that it has spiralled [sic] out of all control and meaning,” and that even the best and brightest researchers can’t figure things out.

It’s tempting to think that bank stocks are back, given the continued mending of the economy and the recent share price performance.

But you simply can’t trust bank stocks. And wise investors will remember that before they get too deep in this murky sector.

Jeff Reeves is the editor of and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at or follow him on Twitter via @JeffReevesIP.

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