Success in the banking world during the past 20 years was measured by a bank’s capacity to devour its competition through acquisition. Banks acquired each other in the name of customer service, even though it was evident that a “financial supermarket” was not a synergistic business model.
The real driver of acquisition activity was to accelerate reported profit growth and paycheck expansion.
Bank of America (BAC), which is the product of an acquisition by NationsBank in 1998, in turn engaged in a major acquisition almost every year for the past two decades.
Wells Fargo’s (WFC) history isn’t much different. Wells Fargo was originally acquired by Norwest Corp. After this acquisition, Norwest management changed the name of the overall company to Wells Fargo. Norwest was one of the most-acquisitive banks of the 1990s, and ended the decade spread across 16 states as the largest contiguous bank franchise in the nation.
Citigroup (C) was formed by one of the world’s largest mergers in history with the combination of Citicorp and Travelers Group.
For dessert, these banks ladled out consumer loan programs in huge servings to ensure that they grew fatter than their neighbors. But now, the feast is over — and what’s most shocking is the size of the bill.
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Check, Please
Year-to-date, BAC is down roughly 75%, WFC’s value is down around 65%, and C has dropped a gut-wrenching 85%, and is dangerously close to dipping below the $1 mark. And individual stocks only mimic the blows the major indices have taken.
Although we are still far from having a final tally on what this credit binge has cost us, it appears it will include the loss of our largest insurance, automobile and bank corporations, along with many of our retailers.
Millions of people have lost jobs, and the world is in a coordinated slump that rivals any financial crisis measured all the way back to 14th-century England, according to Harvard economist Kenneth Rogoff.
As option traders, what this all means is the sideways trend we’ve been seeing has broken to the downside. Yet the CBOE Volatility Index (VIX) reading suggests that the selling is not climatic — and it seems that, no matter how low the financials go, they can always go lower.
How can we stop the hemorrhaging?
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Fixing the Banks — and Fixing Your Portfolio With Options
With the banks engaged in a winner-take-all race to acquire everything in sight, the U.S. financial system lost diversification. Most of the wealth became concentrated in a small number of institutions whose collective skill was acquisition rather than management.
We now have a crisis that requires management. Unfortunately, not only are our leading bank executives lacking prudent management, but we also appear to be stuck with some of the most-aggressive gamblers on Earth, who now have a fresh line of capital, courtesy of U.S. taxpayers.
In reviewing who the biggest political donors were from 1989 to 2008, it is no surprise to find many of the largest banks on the list.
To create a regulatory environment that allowed for rampant merger-and-acquisition activity, loose lending and 40-to-1 leverage standards, political contributions appear to have been a principal part of the strategy.
During this time, contributions by Goldman Sachs (GS) rank No. 4, Bank of America and Merrill Lynch combined rank No. 5, Citigroup comes in at No. 15, JPMorgan Chase (JPM) was No. 25 and Morgan Stanley holds the No. 30 spot, according to OpenSecrets.org, a research firm that tracks political money flows.
The contributions ranged from more than $30 million to about $17 million.
It is often difficult to proactively separate oneself from a current income source. But, if this economy is going to have a chance, the U.S. government will have to wean itself from some of its biggest political contributors of the past and focus on investing in a future that improves the earnings prospects for all citizens and the broader economy.
In the spirit of making changes, we also are required to adjust our options trading strategy to stay in-tune with current market conditions.
To outsmart this market, we need to quickly take advantage of sudden moves to seize profits. And in Big Money Options, we do that whenever opportunity arises, which means our options portfolio is bursting with profit strategies ranging from single-options trades, bullish put-writes, credit spreads and risk-reversal spreads.
No matter which direction the financials and the overall market are heading, there’s an options strategy just waiting to take advantage of it. So, while the buzzards have been circling the carcasses of once-respected stocks, we’ve been feasting on options trades — and there’s plenty of room at the table for traders like you!
Andrew Houghton and Nick Atkeson work together to identify options trading opportunities on the institutional level and, now, for OptionsZone.com readers. To learn more about them, read their bio here.
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