Bank stocks led all other major stock sectors in 2012. The KBW Bank Index (^BKX) rose more than 30% compared to just over 13% for the S&P 500 (^GSPC), and Bank of America (BAC) shares surged 109%--more than doubling in price.
But this stellar performance may mask a very different story about America’s banks.
Jesse Eisinger, senior reporter for ProPublica, tells The Daily Ticker that despite the gains in bank stocks, many are trading below their book value or at depressed multiples, and much of their rally is due to hedge fund speculation that could easily unwind.
“Hedge funds will take a speculative trade on this because they’re willing to move very quickly, but no one who is a true investor...will go into the banks now in any significant size,” says Eisinger.
The reason for their reluctance: no one understands American banks, says Eisinger.
"Everyone throws up their hands and says these guys are black boxes," he says. "[Even] the people who served on the Financial Accounting standards Board, sophisticated investors, regulators, and bank executives themselves."
Eisinger, who co-wrote the story “What’s Inside America’s Banks” in the latest issue of The Atlantic, says banks’ balance sheets are excessively complex, and disclosure rules haven’t kept up with those complexities. In addition, he says recent bank regulations have made a bad situation even worse.
After the financial crisis, “the regulators layered on complexities so Basel III is vastly more complicated than Basel II… and Dodd-Frank, especially the Volcker rule, ... [adds] an enormous layer of complexity that’s going to add to the confusion about banks,” says Eisinger.
Even a bank with a plain vanilla reputation like Wells Fargo (WFC) is complex, says Eisinger. It holds $2.8 trillion worth of derivatives on its balance sheet and $1.5 trillion worth of complex entities off-balance sheet.
And JPMorgan (JPM) --the “best managed bank” led by Jaime Dimon—“the CEO with the best reputation” lost $6 billion due rogue trading in a London office which wiped out a third of its equity.
“These guys are more opaque than ever,” says Eisenger. Banks stocks are not “an area of the economy you really want to put money into.”
Tell Us What You Think!
Got a topic you’d like covered? Have a guest you’d like to see interviewed? We’d love to hear from you! Send us an email at firstname.lastname@example.org.
You can also look us up on Twitter and Facebook.
More from The Daily Ticker: