The recent swings in the stock market have hit U.S. banks hard, but falling share prices are only one in a long list of troubles for financial institutions.
Nearly three years after the government infused the banking industry with hundreds of billions of taxpayer dollars, many large banks continue to struggle with the fallout of the housing bust.
Aug. 9 (Bloomberg) -- Barry Ritholtz, chief executive officer at FusionIQ, talks about stocks, market volatility, and the outlook for Bank of America Corp. He speaks with Tom Keene on Bloomberg Television's "Surveillance Midday." (Source: Bloomberg)
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“They have some fundamental issues that some are improving, but as an industry they’re still weak and haven’t fully healed from 2008,” said Matthew McCormick, a banking analyst at Cincinnati-based Bahl & Gaynor. “I fear it’s going to be several years before they get out of the woods.”
Some analysts argue that the government’s extraordinary efforts merely papered over deeper problems that are resurfacing as the economy slows and the housing market remains depressed.
Chris Whalen, a financial industry analyst and managing director of Institutional Risk Analytics, says government officials erred by failing to restructure the banks in the wake of the crisis by making them smaller and forcing them to acknowledge the depth of the losses.
“Here we are and the markets are getting antsy” again, he said. “If we [restructured banks] two years ago, we’d be done.”
Bank of America, the largest bank in the country by assets, has faced the most pressure from investors. The company has lost roughly half its market value since July amid doubts about its ability to manage its large portfolio of bad mortgages. Last month, the bank reported its biggest quarterly loss of $8.8 billion. The stock price has hit a low not seen since early 2009. And chief executive Brian Moynihan was asked Tuesday in an interview on CNBC whether he planned to resign. (He said no.)
In addition, the bank faces a barrage of lawsuits by investors who plowed money into loans that turned out to be worthless. Earlier this week, American International Group filed a $10 billion lawsuit over such losses. In June, the bank agreed to pay $8.5 billion to investors on similar claims.
“We are aggressively taking action to put the legacy mortgage issues behind the company — even at great short-term cost — and to help get the U.S. housing market going again,” Moynihan said Monday in a letter to bank employees. “We have weathered challenging times before and we will now.”
On Wednesday, Moynihan is scheduled to answer more tough questions in a conference call requested by investors.
It’s not just Bank of America getting battered on Wall Street. Wells Fargo’s stock is down about 20 percent for the year. J.P. Morgan Chase has fallen 14 percent, and Citigroup has dipped 32.7 percent.
Unlike in 2008, banks have not encountered the kind of credit crunch that made it nearly impossible to access funding and prompted the government to intervene. These days, banks have amassed more capital and set aside more reserves.
But grim projections for economic growth, less profitable business lines and, for some, lawsuits and investigations stemming from their loan portfolios continue to weigh on the bottom lines of many banks.
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