Big Banks in Trouble

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Published on Thursday, 25 October 2012 14:22

Written by Sara Nunnally, Editor, Inside Investing Daily

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We called it several months back... a hiccup in Big Bank profits. We told you that the cost-cutting policies of the financial sector were only temporary, that many were still using fraudulent practices, and that they'd have to deal with real economic issues that would hit their bottom lines -- hard.

Well, that's happening.

Check out these headlines:

"Credit Suisse Profit Fell 63% in Third Quarter"

"Santander Earnings Plunge 94% on Real Estate Woes"

"U.S. Sues Bank of America for $1 Billion Over 'Brazen' Fraud"

"Citigroup Productivity Worst of Big Banks, Shows Challenge"

Bank of America's quarterly revenue fell 25.5% this third quarter, with earnings down 94.5%. Citigroup's same figures were down 35.4% and 87.6%.

But none of their share prices have seen a noticeable drop in the past three months... just a blip on earnings news.

View larger chart

In fact, these banks appear to be trying to reverse their downtrend. Bank of America and Citigroup have actually been climbing since the beginning of the year, despite a second-quarter downswing.

How can that be? A big-name bank is being sued by the federal government for $1 billion for selling Fannie and Freddie fraudulent mortgages, and its share price barely moves...

Is this a case of "If you can't beat them, join them," or are we just waiting for the bottom to drop out?

I think it's the latter, and we're fast approaching that moment.

Eighty U.S. CEOs and other businesspeople have signed an open letter to Congress, pleading with it to curb the nation's deficit. And they want this done with a mixture of spending cuts and tax increases.

From a Reuters report:

The CEOs' statement was organized by a group called "The Campaign to Fix the Debt," which is urging Washington to set aside partisan differences to put the country on a sustainable fiscal path. The nonpartisan group said it has raised $30 million over six weeks to help fund a national campaign to push the issue.

The group said any fiscal plan must be bipartisan, tackle all areas of the budget and include tax reform. It also urged the government to reform and improve the efficiency of health care programs like Medicare and Medicaid.

The CEOs, essentially, like the Simpson-Bowles commission plan that deals with spending cuts and tax reforms.

But this plan was shelved long ago because Congress couldn't reach a consensus. Will it now, with 80 Wall Street elites raising money and campaigning for it? Some $30 million has already been raised in the last six weeks to get something done.

We have precious little time to accomplish this.

The letter asks Congress to put something in place as soon as possible after the election... meaning, "Do something game changing in the last seven weeks of 2012 that you haven't been able to do in the last four years."

I don't know about you, but I don't hold out a lot of hope for that to happen.

And when it doesn't, trillions in automatic spending cuts and tax hikes will go into effect, slamming into our still-fragile economy.

It's no wonder banks are scared and why a number of them have signed this open letter to Congress. The faster we can get to stability, the better for their bottom lines. Right now, banks are like paper boats in a whirlpool.

And they're spinning toward the vortex.

Over the next month, we should be looking closely at this sector for an opportunity. There is a lot of weakness already built in to some of these big names, but there's also a lot more pain to come as we start to lean over the fiscal cliff.

While European banks like Santander and Credit Suisse are also in a world of hurt, pay closer attention to U.S. banks as we near the tipping point.

Happy Investing,

Sara

P.S. I recently uncovered another massive Big Bank Scandal. This one doesn't involve mortgages, though. A huge, well-known American bank has brutally manipulated the price of silver. This is one of those stories that seems unbelievable -- global price manipulation, cheating in the markets and even violence in the streets of London. The thing is -- when this manipulation unwinds -- as it inevitably will -- folks who position themselves early and correctly in silver could reap outsized returns. Here's the whole story.