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Banks Are Scarier Than Halloween?
The Motley Fool, that pugnacious purveyor of simpleton investment advice, has taken a meat cleaver to the banking industry. In a rapacious post, the Motley Fool has declared banks “scarier than Halloween.”
Now, I find Halloween pretty scary, so is the comparison truly merited? First, the Motley Fool’s argument:
Fast-forward to today and what we find are huge financial institutions — some, like JPMorgan Chase (NYSE: JPM) and Bank of America (NYSE: BAC), even larger thanks to government-led acquisitions — making most of their money in the dark corners of their business. A glance at earnings reports from Goldman Sachs (NYSE: GS) and JPMorgan show booming business in heavily cloaked trading. Even more traditional banks like Wells Fargo (NYSE: WFC) are finding ways to pull in money through avenues like hedges on mortgage servicing rights. If you enjoyed the gut-wrenching revelations that seemed to come daily during the financial crisis, then you can go about your merry way. But if you’d rather avoid a second showing of that horror flick, then all of the above should be very worrisome.
So Wells Fargo should be criticized for successfully hedging its mortgage servicing rights? Is that not like criticizing the Yankees for deploying Mariano Rivera?
But the Fool finds other faults in banks. For example, leverage is still too high, the site argues:
Another way we can look at the fright factor of the financial industry is by checking out the leverage that these companies employ. As a company stacks more assets on top of its shareholder equity cushion, it starts to look more and more like the final stages of a Jenga game — ready to be toppled by even one poorly timed movement. …
These leverage levels are a far cry from what we saw at the height of the bubble (Merrill Lynch was at 28-to-1 in September 2007), but I’d bet my lucky Chewbacca action figure that without strict regulations these levels will start to creep right back up as soon as the companies see opportunity to cash in with more leverage. Case in point, after dropping considerably, Morgan Stanley’s leverage ratio has risen each of the past two quarters.
Again, this can be seen with two vastly different perspectives. Sure, leverage can be dangerous, but is Morgan’s advancing leverage truly a sign of danger in our midst? Or is Morgan simply on the mend after taking body blows from the credit markets?
Finally, Motley Fool tars banks for engaging in proprietary trading:
At the same time, until we get better transparency from the major financial institutions, it’s hard to tell what exactly some of them are doing to earn their huge bottom-line profits. While the “well, they’re making money so they must be doing something right” philosophy might work for a while, unless you know which earnings streams are sustainable and which ones aren’t, you may be setting yourself up for a bone-chilling fright if some of those trading strategies start looking like profit-devouring zombies.
Isn’t that always the case in banking, and the case as well in so many industries? Is not ExxonMobil Corp’s earnings reliant on the vagaries of the global oil markets? Such vagaries are anything but “sustainable.” Am I missing something here? I am all for more transparency and remedies to our zombie banking problem, but it seems like some personal finance advisors are taking the easy road and tarring all banks with wild assertions. What is going on here?
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