BREAK THE BANKS
A pair of Wall Street’s most vocal pundits and the world’s most prominent trader yesterday managed to suck the air out of a month-long rally fueled by the hope that banks have seen the worst of more than a year of harrowing losses.
It started when veteran bank analyst Michael Mayo, who recently moved to research outfit CLSA from Deutsche Bank, warned that loan losses at banks could hit levels not seen since the Great Depression.
Mayo, in a research note entitled “Seven Deadly Sins of Banking,” cited a lust for high yields and a thirst for construction and home-equity loans as a few of the most egregious sins committed by the nation’s largest banks.
His comments came as he initiated CLSA’s coverage of 11 major financial firms, providing one grim outlook after another for each. He slapped “sell” ratings on five firms, including regional banks Fifth Third Corp., US Bancorp and KeyCorp, and issued “underperform” ratings on bigger names such as Citigroup, Bank of America and JPMorgan Chase.
The report turned out to be only the start of bad news for banks, which are set to roll out first-quarter financial results later this month.
* George Soros told Reuters in an interview that the “banking system as a whole is basically insolvent,” which only added to the trepidation and uncertainty that’s been waiting in the wings for the past few weeks.
Then bank analyst Meredith Whitney added her two cents, predicting on CNBC that home prices would fall further and weigh on banks’ already bruised balance sheets.
Their comments combined to blunt the market’s attempt to start off the week where Friday left off, when the Dow capped off its best four-week rally since the 1930s and closed above 8,000 for the first time since March 9.
The shifting tide of market sentiment dragged the Dow Jones industrial average down by as much as 155 points before recovering, gaining back some ground to close at 7,975.85, a 41.74-point drop.
The Standard & Poor’s 500 index fell 7.02 to 835.48, while the Nasdaq composite index fell 15.16 to 1,606.71.
In his report, Mayo suggested US banks could see an additional $400 billion in writedowns on souring commercial real-estate debt and consumer loans.
“We’re initiating coverage of US banks with a sector underweight given increases in problem loans and the government’s inability to quickly resolve problem loans that, on average, are marked to only 98 cents on the dollar,” Mayo’s report said.
However, Mayo did offer the possibility that things could turn around, but only if the banks decide to accurately value their legacy assets, including mortgages, or shed them entirely.
Citigroup fell 13 cents to $2.72 yesterday. JP Morgan fell $1.08 to $28.20. Bank of America was down 12 cents to $7.48.
US Bancorp fell 73 cents to $15.24. Fifth Third Corp. was off 21 cents to $3.07; and KeyCorp fell 60 cents to $7.94.
