If it can happen at JP Morgan Chase, it can happen anywhere.
The bankers at JP Morgan (JPM) were supposed to be the smart guys. The grownups. The ones who didn’t need the Volcker Rule because they would never take the types of colossal risks that brought us to the precipice of financial collapse in 2008.
CEO Jamie Dimon had been lobbying—credibly it seemed—against increased regulation, saying that it was unnecessary and that restricting speculative investments would limit banks profitability. Then BAM…the company reports a $2 billion trading loss that shocked Wall Street, Main Street and Washington! The news has shaved a quick 10% off JPM’s stock in particular and sent the entire financial sector tumbling.
The irony here is that trades that went south for JPM were actually an attempt to hedge against risk, but using complex synthetic credit derivatives. There was some very poor execution on their part, which even Jamie Dimon had to admit was “a terrible egregious mistake” and also described as “sloppy” and “stupid”. In an effort to restore investor confidence, Chief Investment Officer Ina Drew, who oversaw the trades and two of the traders who worked for her resigned on Monday.
The problem is not that JPM can’t afford the loss. The company had pretax income of $7.6 billion last quarter, so they can cover it. The problem is that they gave investors yet another reason to doubt the stability of financials. Plus, I’m sure we’ll be hearing calls for increased oversight from Congress.
This is yet another huge black eye for the financial industry, and coming as it does on the heels of the scathing op-ed critique of Goldman Sachs in the New York Times by Greg Smith when he resigned in March, it is really shaking investor confidence in financials.
If they’re not careful, bankers are going to knock off lawyers on the list of most hated professions! From bailouts to blunders, from fees to foreclosures, people have extremely negative view of the industry as a whole.
And that’s a shame, really, because there’s plenty of money to be made in the sector. You know the old quote from Baron Rothschild, “Buy when the blood is in the streets”, well, bank stocks are certainly bloodied these days.
Yes, I’m saying it is time to buy financials. They have to rebuild trust with consumers and investors, so buying them now could take a while to pay off, but there is big potential in some of these stocks. If you look at the underlying picture, a bullish case starts to emerge. The fixed income story isn’t as weak as you might think. Aggressive cost cutting and streamlining over the past four years has boosted the bottom line. Housing might still be an issue, but more borrowers are making their payments on time these days, and the banks have profited from a boom in customers refinancing their mortgages to take advantage of lower interest rates.
Take Bank of America, for example. BAC was one of the most beaten down of the financials, falling from a high of over $50 before the crisis to a low of $3. The stock has bounced around since then, but caught my eye last fall when it was trading around $6. Believing that BAC’s worst problems — bad loans in the mortgage crisis, poor acquisitions, unhealthy balance sheet maintenance and damaged customer relationships — had been fixed, I recommended it to investors in November. The stock is up 23% since then. And Morgan Stanley (MS) was trading about 50% below where it should be before the news of the JPM losses dragged it down even lower.
If you're looking to make a contrarian play right now, bank stocks are definitely worth a look.