Shares of the biggest U.S. banks took another pounding on Thursday, as Moody's followed through with long-telegraphed downgrades. The "she loves me not" messages were exacerbated by disappointment over the Fed's "Operation Twisted" action and new fears about the European and U.S. economies.
I still believe that in a few months -- perhaps just after Election Day -- we'll look back at this period and conclude that spring-summer 2012 was a bottoming period for U.S. banks, (hopefully) presaging the start of a multi-year recovery. Even though JPMorgan's (JPM - Get Report) much-ballyhooed hedging losses have seemed to hamstring the industry just as it was preparing to emerge from the penalty box, CEO Jamie Dimon's defenses in the House and Senate could prove to be an inflection point.
Investors may return only slowly to the banks, as they await proof that the global economy won't collapse and that re-regulation set in motion by the Dodd-Frank Act will ultimately avoid worst-case options for raising bank capital and liquidity standards, curbing proprietary trading, forcing the clearing of derivatives and insulating mortgages from lawsuits and risk-retention rules.
But if U.S. equity markets are to become the place to be for global investors over the next five years or more, as many now believe, U.S. banks should ultimately benefit. So I'd suggest that you start doing your homework on the banking story now, while things look bleak.Not that we might be in for anything like the catalysts and long-term secular rally that we saw after the last big re-regulation cycle spawned by the banking and thrift crises of the Reagan-Bush era. That five-year period saw passage of the 1987 and 1989 thrift bailout bills, the 1991 FDIC Improvement Act (creating prompt corrective-action tripwires and recapitalizing the Bank Insurance Fund) and the 1992 law that initially sought to regulate Fannie Mae and Freddie Mac. The wave subsequently spurred a deregulation cycle that coincided with the Clinton-era bull market. Specifically, in 1994 we saw the first subprime loan legislation and the end of restrictions on interstate banking and branching. But the subsequent combination of a Democratic White House and GOP Congress yielded securities litigation reform in 1995, the grandfathering of "nonbank-banks" in 1997 and, finally, repeal of the Glass-Steagall Act in 1999. As I like to recall, even my former colleague and long-time uber-bear bank analyst, Mike Mayo, now of Credit Agricole, was a bull back then.
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