(Updated with final stock price moves throughout.)Financial stocks finished mostly lower Thursday, with Bank of America ( BAC) shares slipping after former Treasury Secretary Henry Paulson testified before Congress and JPMorgan Chase ( JPM) losing ground following its second-quarter earnings report. The House Committee on Oversight and Government Reform grilled Paulson Thursday on his role in the BofA- Merrill Lynch deal. In his remarks, Paulson said he did threaten to remove BofA's management if it walked away from Merrill Lynch, calling the threat "appropriate" because their invocation of a Material Adverse Change, or MAC, clause would have shown "a colossal lack of judgment." However, Paulson did tell the committee that he did not advise the CEO to hide any information from shareholders, and that he believed that BofA scrapping the Merrill deal would have caused havoc for the broad financial system. BofA CEO Ken Lewis testified in June that he considered scrapping the transaction because of "significant accelerating losses," but that Treasury and Federal Reserve representatives asked him to delay any such action. Last month, Fed Chairman Ben Bernanke appeared on Capitol Hill to defend his role in the acquisition of Merrill, downplaying the regulators' influence. In other BofA news, the bank is operating under a memorandum of understanding that requires it to overhaul its board and address perceived problems with risk and liquidity management, according to a report in The Wall Street Journal. The MOU gives banks a chance to work out their problems without the glare of outside attention, the report notes, citing people familiar with the situation. BofA shares finished lower by 25 cents, or 1.9%, to $13.17. The bank will report earnings Friday before the start of trading, with analysts expecting a profit of 28 cents on revenue of $33.1 billion, according to Thomson Reuters.
On the earnings front,
JPMorgan Chase ( JPM) reported second-quarter top- and bottom-line results that easily beat the Thomson Reuters average estimate. JPMorgan reported a profit of 28 cents a share, down from 53 cents in the year-ago period, but far better than the 4 cents a share predicted by analysts. The bank said quarterly revenue of $27.7 billion was its best ever for a quarter, easily surpassing the Thomson Reuters average target of $25.89 billion. However, in a brief email note, Rochdale Securities analyst Dick Bove cautioned investors on JPMorgan, arguing that the better-than-expected showing in the bottom line was due to "a fuzzy set of capital gains numbers." "A quick review of JPMorgan's second quarter reveals that the company had sequential declines in loans, deposits, and margins," Bove wrote. "Its trading revenues were very disappointing. The key in looking at these banks to us continues to be the direction of non‐performing assets. This was not good for this company." JPMorgan shares fell 50 cents, or 1.4%, to close at $35.76. In other bank news, Citigroup ( C) shares dropped 4.4% after a report in The Financial Times that said the bank is reportedly close to a secret agreement with regulators that will increase scrutiny of the U.S. bank and force it to fix financial, managerial and governance issues. The FT report, citing people familiar with the matter, said that a proposed agreement between Citi and the Federal Deposit Insurance Corp. requires, among other things, that Citi strengthens its board and governance, improves asset quality, better manages expenses and provides more information to regulators on its capital and liquidity.
Citigroup shares fell 14 cents to $3.03. Citi will also report quarterly results before Friday's opening bell. Wall Street is forecasting a loss of 37 cents a share on revenue of $22.35 billion, according to Thomson Reuters. CIT Group ( CIT) was among the worst performers of the session, falling 75% after CNBC reported that the troubled lender is likely to file for bankruptcy as early as Friday. CIT late Wednesday said that "there is no appreciable likelihood" of new government support over the near-term, raising the specter of bankruptcy for the commercial lender. CIT and federal regulators had been talking over the past several days about possibly securing a temporary government loan from the Treasury Department and Federal Reserve to allow the lender breathing room to strengthen its balance sheet. CIT shares slid by $1.23 to close at 41 cents. Among other losing bank stocks, Wells Fargo ( WFC) gave back 1%, Morgan Stanley ( MS) lost 0.8%, US Bancorp ( USB) was down 0.1%. On the winning side, Goldman Sachs ( GS) added 1% and American Express ( AXP) rose 3.9%.