Remember the Economic Collapse of 2007-2009? The Great Recession is what many refer to it as. More accurately, it was the “Great Bailout” and the effects are still being felt today and will be felt for many more years to come.
The Great Bailout was a debacle of monstrous proportions. To date more than $3 trillion has been overspent to fix the damage caused by the most hated business sector in America: the banks. If you recall, they were the primary culprits behind the collapse, aided in no small part by vast chunks of the general population who decided that living beyond their means was the “new normal”. We all know how it ended for the consumer. Bailouts and bankruptcies, an opportunity to walk away from debts and responsibilities and let those who pay their bills shoulder the burden of rebuilding the economy.
There’s quite an interesting game going on in Washington and New York. It bears watching as it may provide you with an outstanding investment opportunity.
The banks are still paying the bills, and the bills keep increasing. Last week JP Morgan (JPM) was in talks to pay $13.8 billion in fines for their part in the mortgage crisis. This is on top of untold billions paid in the past two years to settle all manner of litigation and fines. Next in line was Bank of America (BAC) which has paid billions more to settle allegations that it did all manner of evil to the consumer prior to the crisis. Wells Fargo (WFC) was not far behind either.
There are two things that most people are missing about this whole situation. The first is that these banks are paying for mistakes and fraud and poor business dealings made, for the most part, by companies they acquired during the crisis. Well, maybe acquired is the wrong word. These banks, especially JP Morgan and Bank of America, were in no danger of failing as financial institutions during the collapse. They were two of the stronger banks. How do we know this? Because they were forced to takeover four massive companies that were going under or about to: Washington Mutual, Countrywide Financial, Bear Stearns and Merrill Lynch.
By taking these companies over under threat by the government that if they did not, the system would collapse and take the banks down with it, JPM and BAC took on huge piles of crap, especially in the case of Countrywide, Bear Stearns and Washington Mutual. Today, the banks are being sued by the same government to pay for the mistakes made by those companies. It’s wacky.
But, out of the wackiness is where the opportunity arises. The government is going after these banks today for one reason and one reason only. They can afford to pay the billions of dollars in fines and restitution because they are MAKING billions of dollars in profits. And that is what investors are failing to see.
This stream of fines and penalties is not just beginning; they are actually getting close to the end of the major items. Sure there will always be lawsuits for this or that. But these are the biggies, the multi-billion dollar widow-makers.
Once this period is past, and the bulk of the liability is lifted, probably by the middle or end of 2014, these banks will see share prices move higher as their true earnings power is laid bare for all to see, without the myriad of accounting footnotes.
Right now JPM is trading at about 8 times what it could earn next year with out all the charges it is being forced to take. Historically the shares have traded at 12 to 15 times earnings. Bank of America is trading at about 60% of its book value when in normal times it has traded at close to two times book value. And, in the latest quarter the bank blew away earnings estimates. This is all happening in a low interest rate, low growth, high regulation environment. Consider what these companies can make if the economy picks up steam or if interest rate spreads increase or if lending restrictions are eased even a little bit? We could easily see the price of each company increase by 50% to 100% in the coming 18 to 24 months.
To your wealth,
Banker X.
