Large Bank Earnings or Why BAC Went to $4

rcwhalen's picture

New York -- Writing in the Wall Street Journal, David Reilly opines “Big U.S. banks at least have this going for them: 2012 probably won't be as bad as the year just past.”

Well, maybe. 

First let’s set the stage.  There is a school of thought that says the transit of Bank of America (BAC) common to $4 last month was the final venting of evil humors due to the housing crisis.  Now that the common of BAC is closer to $10 than to $0, the same story goes, the large cap financials are poised for a sustained recovery.

Sad to say, BAC did not trade down to $4 because of a collective epiphany regarding the housing market or large bank exposures to same.  In fact, say a number of sources who trade these markets, BAC nearly touched its belly on the tarmac wheels up because of short selling pressure on EU banks. 

As part of their collective flight from reality, the leaders of the various EU states have banned short selling against EU banks.  Since virtually all large banks in Western Europe have been nationalized, falling prices for bank stocks are the functional equivalent to falling government bond prices.  This merger of bank and sovereign has a nasty implication for the political class in the EU.  Thus short selling against EU banks is not allowed.

With investors no longer able to sell short EU banks, the selling pressure in the markets falls squarely on the large US financials, a few of which have some relatively modest exposure to the EU.  When a New York based hedge fund wants to take a position against the banks in the EU or even UK, hitting the bid on BAC or JPMorgan Chase (JPM) is somehow seen as a worth-while trading strategy.

Thus the noise in many of the stocks for large cap US banks is coming from their insolvent cousins in the EU.  If we could but put aside this noise for a moment and focus merely on the actual financial results for the zombie dance queens, what would be a reasonable expectation?  As with most of 2011, down revenue and record earnings!

Dawn Kopecki and Daikin Campbell at Bloomberg News tell us that “JPMorgan is projected to report a record $18.5 billion in 2011 earnings when adjusted for one-time items, a 6 percent increase for the New York-based company, according to a survey of analysts…” 

Analyst surveys have now risen to the level of fact, as we all know.  Thus Bloomberg and other news outlets feature detailed reports about the opinions of the Sell Side community as though these musings were burned into stone tablets with the fire of the Holy Spirit.

According to the Sell Side community, JPM is expected to bring in record earnings with a 13% decline in revenue for Q4 2011 and a mere 5% drop for the full year.  The same analyst consensus, if we may so dignify this collection of guesses, has 2012 revenue down a mere 1% from 2011.  So while the folks at JPM may be able to manipulate their balance sheet so as to manufacture the “record earnings” so breathlessly described by my friends Kopecki and Campbell, is this really a positive for the stock? 

Speaking with people in the operations side of the top four banks, it is pretty clear to me that there is zero visibility on earnings or revenue in the CSUITEs of the largest banks for 2012.  How analysts are able to estimate full year 2012 earnings for JPM when nobody in that bank knows what will happen in Q1 2012 is really a testament to the intelligence and acumen of the Sell Side analyst community.  

While smaller institutions are starting to stabilize and even grow business volumes, the large cap financials are seeing their Wall Street business shrink even as traditional lines such as mortgage banking and credit cards are flat at best.  The procession of layoffs in areas such a prop trading, investment banking and retail branch personnel tells me that managers are desperate to trim their sails going into a very uncertain year.  And you will see a lot more layoffs in 2012. 

We should recall that the Wall Street side of the universal banks came to the rescue of the commercial banking side of the house in 2008 and each year thereafter.  The supra-normal returns earned by JPM and the surviving dealer banks helped to offset losses on the banking side of the house, but now comes the question: who will pick up the slack now that the party is over on the capital markets side of the business?     
To me, the answer to that question will determine whether Dave Reilly is right about 2012 being better for the large cap financials than 2011.  While I am generally bullish about the prospects for the US banking sector, that happy optimism does not extend to JPM, BAC and their zombie peers. 

The good news is that revenue and earnings are likely to come in lower in 2012 than 2011, hardly a bullish factor for these respective stocks.  But the bad news is that BAC and, to a lesser degree, Wells Fargo (WFC) remain mired in problems related to housing exposures and related litigation.  Neither one of these banks is doing an especially good job with disclosure regarding these risk factors, so investors are basically on their own. 

Suffice to say that when you see 1) Ally Financial file bankruptcy and 2) Bank of New York Mellon (BK) finally break the alliance of convenience with BAC and sue the large bank of behalf of RMBS investors, then you will know that we are getting closer to the end of this horror film than the beginning.

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onebir's picture

Shame Reggie - whose analysis is also great - can't match this for succintness...

hannah's picture

"Dawn Kopecki and Daikin Campbell at Bloomberg News tell us that “JPMorgan is projected to report a record $18.5 billion in 2011 earnings when ADJUSTED FOR ONE-TIMESITEMS, a 6 percent increase for the New York-based company, according to a survey of analysts…” 



847328_3527's picture

BAC ain't going nowhere with these toxic mortgages:


Wednesday, January 11, 2012 Michael Olenick: 9.8 Million Shadow Inventory Says Housing Market is a Long Way From the Bottom

Put more simply, things are actually worse than any of the prevailing estimates indicates, although Goodman is very close to the mark. Current loss experience suggests that this figure is staggering, easily in the $1 trillion range.

"Nobody needs to go anywhere else. We are all, if we only knew it, already there"

Huxley, Island

rosiescenario's picture

In less unusual times, BAC would be an obvious short, but this is not your daddy's market.....


B'berg's headlines are designed to feed the algo' see it over and over....the headline screams one thing which is then refuted once the article is fully read and understood.....maybe there is a stuxnet algo out there writing the headlines to manage the other algo's??????

SwingForce's picture

End the Fed, save the taxpayers.

falak pema's picture

Circular capitalism; where the ECB lends money to Eurobanks @ 1% via  LRTC to buy Soveriegn bonds with 3-6% Yields which then get deposited with ECB @ .25% by the same banks! Allowing those ponzi banks to improve their private balance sheets by socialising their debts, sterile exercise as it doesn't solve root cause. Can anything be more crazy than this?

And the FED does the same thing with unlimited printing and Zirp, to feed the ponzi creating PD/HF community beast with liquidity, levitating the markets and instrument of carry trades to HFs attacking the EUrozone weak peripherals, where the spreads are gigantic; how the market and notationals can justify money market lending to zombie TBTF banks @ .01% by FED, all the while they ask 7%+ for Portugal, aka a lending rate ratio of 700% relative to a sovereign that can raise taxes, so has access to assets (whereas those banks have debts that are beyond hopeless compared to their lousy BS assets, if you included all the off balance sheet, incestuously interlinked crap!!!), is beyond all rational "free market" functionality. 

Circular capitalism going nowhere except increasing the debt as there is NO sign of visible real growth in the first world economy, where debt mountain grows alarmingly. All inflation numbers are fudged, as those of unemployment rates. Pure bureaucratic, systemic sleight of hand in ALL developed economies. The role of corrupt governance, hidden under the carpet.

Assuming that the burgeoning BRIC economies, launched thanks to "outsourcing" on an asymmetric growth tangent, can rescue those first world duds who account today for 80 % of world GDP and 99.9% of world debt, is nothing short of suicidal Hopium. And criminal mayhem at the expense of the people, as this whole financial architecture is based on cheating and lying by the financial community with their crony politicians looking the other way.

This current exercise of world financialised capitalism has laid bare to the people of the world some very simple long term truths :

1° Free Markets and invisible hand is exposed as a sick cynical joke. Always has been. Joan Robinson was right. THe only rule in capitalism, as practised in our nation state legal frameworks, now gone global to totalitarian oil monarchies and third world one party oligarchies,  is Oligarchical concentration; with rampant corruption and market manipulation as inevitable resultant. All economic growth is based on comparitive advantage of labour and cheap access to nature's gift, RMs of Earth's crust. Basically all labour intensive, as capital is only labour in proxy form. Make no doubt about this truism.

2° Capitalism and especially 20th century capitalism, under the aegis of PAx Americana since 1945, is nothing more than a proxy for cheap labour arbitrage all over the world, and cheap energy arbitrage, essentially based on one commodity : OIL.

The whole construct of Pax Americana since 1945 has been built on three main axes, carefully planned by Big Business and Big Government in DC, home of the Corporate Welfare State construct :

a) Cheap Oil. When USA peaked in oil production in late 1960s  as biggest world producer, early initiator of oil/motor car model (Rockefeller-Ford national hegemony of early 20th century), the whole energy shooting match evolved around the ME oil patch, Jerusalem of oil, concentrated form of transportable fossil energy. The Seven Sisters ruled the world.

b) Exorbitant privilege. Or the USD money line hegemony and its corruption since 1971 into debt mountain economy by Richard Nixon (Our money, your problem). With the creation of the uncontrolled EUrodollar market in 1971 onwards, the offshore USD market moved to City, LOndon. It then mushroomed into the Petrodollar market, as peak US oil allowed OPEC to become top-dog partners of Seven Sisters cartel; thus essential ingredient to Kissinger's ME shuttle diplomacy to sanctuarise the OIL patch political construct. (THe Israel/Egypt/Saudi 'defacto' alliance and planned destruction of 'pinko', third world/soviet leaning, independent governments inherited from 1955 Bandung Asian-African conference axis). The Thatcher construct fed on the teat of the now burgeoning City financial economy. She made it the home of the Oligarchs and of deregulated 'offshore' finance, even more so than WS. SHe and Volcker snapped the 1979 inflation spiral and decoupled salary indexing to inflation. It allowed subsequent Reaganomics model to create the current deregulated, ponzi construct and the NWO that was shooed in after Berlin Wall and Soviet collapse. Now the Ponzi, bubbled risk asset economy could really begin on a world-wide scale. This synthetically financialised economy fed FIRE sector and replaced the business cycle; all the while deindustrialising the first world, thanks to international labour arbitrage and crony third world one-party controlled political collusion,  to line the pockets of "the happy few". Hallelujah, land of the free became land of the totally indebted.

c) Behind the financial and energy curtain, the MIC of USA built the Arms BAzar model, subsequent to 1962 Cuba crisis. Where it became evident that NUclear first world stand off was no longer feasible. The arms bazar, (USA leading the competition against competitive might of the USSR and French, Kalashnikov and Mirage planes syndrome,  to all and sundry), has built the US military global hegemony of massive military retaliation. All you have to do to understand this construct today is to look at the map of US military bases around Iran. It says it all, as it reflects the same type of MIC construct ALL over the world. Same military noose and overkill everywhere, on six continents. 

SO Pax Americana based on these three fronts is now facing the inevitable fall out of its unique capitalistic construct; that splutters under debt mountain, under ever increasing rising MIC hegemony sustainance costs, under peak Oil world-wide scenario, under the alarming ecological menace which will cost more than an arm and a leg  globally, if we stay on this path, and finally, under the demographic explosion world wide totally correlated to the cheap energy miracle of 20th century.

In the face of this seemingly insurmountable challenge you don't need an IQ of 145 to realise that a huge number of black swans are now swirling around over Planet Earth. SOmethings got to give if we want to avoid collective mayhem as a species, become biodegradable cousins of the Dinosaurs; it has to be PAx Americana construct, as it has led us straight into this wall from where there is no issue at all. Those who rule the world are not fit to exercise this function, at least not on their own.

Paradigm change of profound magnitude is the only way out. And it will be very painful. Think 1300 century... hundred years war and the plague, and you'll understand that the 21 st century will be a bitch; unless somebody invents the perpetual energy machine without green house effect at a cost below grid parity! WHere is 'Einstein squared'? Prometheus's new son to concoct this miracle...

We never stop being the eternal optimists in the midst of our own decadence. We'll have to change our visible skins pretty fast, like the proverbial snake, to survive our own Oligarchical hubris.


disabledvet's picture

that's a lot of verbiage for saying "the too big to fail banks" are in fact not only not too big to fail...they're too big to even succeed. insofar as the economy i say whether the US stays on the recovery path is up the the FED now as "the Great Decoupling" between the entirety of Wall Street and any semblance of any ecnomy anywhere is met with the Zero Percent Financing of "whatever works" in Washington DC. In short the world's financial center is now Ben Bernanke and his ability to keep the..."lesser known banks" working, lending, etc. Good article btw.

Spigot's picture

I will assume that you understand the "House" always wins, correct?

The "Rule Makers" always rule, push come shove, in favor of the largest at the expense of those less large.

"Reality", if defined by elites who can ignore all rules, create infinite digits, hide inconveniences, shift liabilities, is what the elites say it is.

Witness Japan: utterly insolvent, yet functional after 20 years.

Unless there is an exogenis event which forces failure, there will be failure only for those who do not control the levers of power.

At some point the structure and facade of this fiasco will indeed fail. The future history books will detail the superficial events that "caused" it. The reality is that it was a standing failure that finally fell. And most probably it fell because the elites found a way to escape the downside of failure for themselves and to put it on everyone else.

In the mean time I am thumbing through the seed catalogs picking out which potatos I am going to plant this spring.

twotraps's picture

 Falak, agree with you.   The circular nature of it avoids the real problems, as you said, and perhaps the rest of the charade insults the notion of 'value'.   Are they going to such lengths to keep people from seeing thats its all a Silly Game with no real rules, no failure, no way to account for or assess anything, and no consequences for political-economic decisions?   Are they blind to fragility in the system......or are such circular sollutions proof they are terrified of the mkt properly pricing the situation??  Enjoyed your post, well done.

twotraps's picture

Think of this...MF Global issuing statements, research statements of course, on the nature of the financial landscape, up and downgrades on various banks/brokerage units, earnings commentary etc bla bla bla.  It turns out its all a sham!  Why do people take anything they say seriously?  Honestly, they can't forecast their own earnings, or are not allowed to, but they seem to know everything about 'other banks'.  Is this research a relic from the days when it was an actual source of information provided as a service from the company?  Back when banking and brokerage was separate and there was little insanity of Hyper-Hypothecation from all the London offices of these businesses.


Best line that sums it up for me.....'investors are on their own.'

gojam's picture

I thought the UK didn't jump on the bandwagon and ban short selling.

Should references to EU be changed to EZ (Eurozone)

Peter Pan's picture

...."when you see 1) Ally Financial file bankruptcy and 2) Bank of New York Mellon (BK) finally break the alliance of convenience with BAC and sue the large bank of behalf of RMBS investors, then you will know that we are getting closer to the end of this horror film than the beginning."

That last sentence says it all. The banks have devoured the public, the investors and governments. They are now turning on each other for both survival as well as their next meal.


rosiescenario's picture

"King Rat" comes to mind......

Thunder_Downunder's picture

lets also not forget that most of 2011 'earnings' came from one time accounting gimmicks. 

Tuffmug's picture

Yeah, like Goldman's and JPM's $1.2 billion theft from MFGlobal customers!

swani's picture

B of A will go the way of MF Global after the election with 2.2 trillion of deposits that will make it into the hands of the usual suspects. 


El Gordo's picture

The price of BAC will be whatever TPTB say it is.  That's just the way things are in Obamaville.

Ned Zeppelin's picture

Or Bushville. Or McCainville. Or Palinville. Or Romneyville. or Gingrichville. or . . . . . .

fourchan's picture


Random_Robert's picture

Yes, Just as the GSE's were rendered insolvent in 2008.


Hence, we can expect that when BAC finally croaks, that the large commercial banks will ALL be taken under Gov't control, and it will be handled similar to the way Paulson handled TARP:

"You are either ALL gov't run companies, or you ALL fail..."

And I guarantee you that every one of those CEO's (including tough guy Jamie Dimon) will cave.

Chief KnocAHoma's picture

Good point, but it will be more capital injections, not direct gov control, and the demand won't be as harsh. Cause if the banks fail, the gov fails.

Ned Zeppelin's picture

And I see the folks giving the orders as the Banks, not the government. You've confused who works for who. 

Random_Robert's picture

I'm not so confused as you might think...

Monetary Oligarchy only enables one to wield power from the shadows...  when the power has to be exercised in the light of day, only legal and political clout provides the appropriate shield...

Hence- when the insolvency of the TBTF's becomes so obscenely obvious that no amount of smoke can obscure the image in the mirror, DC will be where the resultant marching orders come from.

The commericial banks are NOT running the show. They know that with one swoop of the pen, mark to market can be brought back, and they can all be relegated to Chapter 11 instantly.

When a gun is being held to your head, you are not Godfather...


falun bong's picture

BAC trading at 1/3 of "book" value means...people are pretty scared about what those book value assets are. I agree.

Georgesblog's picture

Everything swept under the rug is starting to smell.  If they had a crazy uncle who believed that he was Teddy Roosevelt and that Panama was in the basement, they could have just buried the bodies of evidence in the basement. Now it's to late. Cousin Johnnie is about to show up in the form of inflation. Peter Lorre is perfect, in this scene ....."Oh, nooooo..... Johnny! Not the printing press!! There isn't time. We have to get out of here!"