I believe America's biggest issue is remembering its past history. After spending 20 years in the Financial Services industry, I'm lucky to know this first hand and have stayed out of any U.S. managed Financial Services stocks and REITs during my investment lifetime - it has served my portfolio well. The stories coming out on JPMorgan-Chase (NYSE:JPM) and Facebook's (NASDAQ:FB) IPO underwriting analysis should not be a surprise to anyone. The future will not be any different and here is why:
In 1933, during the great depression, many believed that the financial collapse was brought on mainly by improper banking activity between commercial and investment banks in the stock market. Two members of Congress, Senators Carter Glass (NYSE:D) and Henry Steagall put their names on what was then known as the Glass-Steagall Act (GSA). This act separated commercial and investment banking activities. Later in 1933, congress would pass the Securities Act and in 1934 the Securities and Exchange Act which created the SEC. Both these acts were put into place to shore up investor confidence by providing investors with more reliable information, reporting, and clearer rules to insure honest transactions.
Fast forward to 1999:
Many believed that the Glass-Steagall Act was now impeding the US economy. It was a bill written 60 years ago and thought to be vastly outdated for today's modern society. A quote made by one senator in 1999:
"The concerns that we will have a meltdown like 1929 are dramatically overblown," said Sen. Bob Kerrey, (D-Neb.).
On November 12, 1999, Congress passed and then President Bill Clinton signed into law, the Gramm-Leach-Bliley Act (GLB), also known as the Financial Services Modernization Act. The act would repeal the original GSA Act by knocking down the barriers to allow commercial banks, investment banks, and even insurance companies to join forces, at will… With Bill's simple stroke of a pen, America forgot nearly 60 years of its past history. Citigroup (NYSE:C), JPMorgan Chase and many other firms would join forces to become "To Big to Fail" companies and…..
Fast forward to 2008: The American Financial System Collapses.
11/12/1999 is a day that will "live in infamy."
How many more land mines lay out on the horizon from our "To Big to Fail" financial services firms? Until Americans learn from their past history, we will see more stock market aftershocks created from the repeal act of 11/12/1999. U.S. managed financial services stocks may be great for day traders, but if you are looking for growth, a steady stream of dividends, or both, this is not the sector to be looking in. Until our government repeals the Gramm-Leach-Bliley Act, and forces financial services companies to split off the components that are not their primary focus, investing in them will only be good for target practice.
If one looks for sector coverage in financial services, just look to our northern neighbor in Canada. Their financial system is much more sound than ours, their government has much more stringent laws for their financial services industry, and have not passed the acts that would allow any of them to become "To Big to Fail." Banks like Toronto Dominion (NYSE:TD) and Bank of Montreal (NYSE:BMO) have offered sound yields, good financials, and no dividend cuts during the last five years.
Can Citigroup, JPM, American Int'l Group (NYSE:AIG), Bank of America (NYSE:BAC), just to name a few, say the same? The latter group all got caught up in the 2008 financial crisis by earlier investments made in companies that were not their primary focus. Investments prior to 11/12/1999, would not have been allowed.
The Dodd Frank Act of 2010, may make you feel better about getting a mortgage, but won't help investors sleep at night or make them feel any more comfortable to invest in commercial banks, investment firms, or insurance companies.
Disclosure: I am long TD.