Over the last few weeks, we've read many articles about which stocks are considered the best in the U.S. banking sector. While reading the articles, we realize just how big these banks have become.
1) Wells Fargo & Co. (NYSE:WFC): $178 B
2) JPMorgan Chase & Co. (NYSE:JPM): $137 B
3) Bank of America Corporation (NYSE:BAC): $ 84 B
4) Citigroup Inc. (NYSE:C): $ 78 B
5) U.S. Bancorp (NYSE:USB) $ 62 B
Wells Fargo and JPMorgan are the 17th and 24th largest entities, respectively, in the U.S. Wells is bigger than Procter & Gamble Co. (NYSE:PG) and The Coca-Cola Company (NYSE:KO)! JPMorgan is bigger than Verizon Communications (NYSE:VZ), BP Oil, and McDonald's Corporation (NYSE:MCD); while Bank of America, ranked 54th, is bigger than Home Depot, Kraft, ConocoPhillips, and Altria. Citigroup, ranked 58th, and U.S. Bancorp, ranked 81st, round out the list of biggest companies in the U.S. No wonder we have nicknamed the banks in the U.S. banking sector "Too Big to Fail."
How could this have happened?
I penned an article in June, U.S. Financial Services Stocks, Just say No, which explains how our very own government passed a legislation in 1998 that would allow banks, investment companies, and insurance companies to merge into massive conglomerates of their very own. Their sizes would be so massive that they would again take down the U.S. economy to near-depression status in 2008, if not for government bailouts, just as they did back in 1929.
How soon we forget! Circa 2012, as investors, we…
- Overlook the trading losses at JPMorgan Chase.
- Overlook the dividend cuts by nearly every U.S. bank.
- Overlook the required government bailouts, whether they needed them or not.
- Overlook the thousands of government regulations/laws passed just in the last three years.
- Overlook the same regulations/laws that are stifling the consumers they were empowered to protect.
- Overlook the CFPB and the pains it is causing our top U.S. banking picks.
- Overlook the lack of competition the banks no longer have to deal with.
...and overlook all of the above and still read positive articles asking us to invest our hard-earned capital as if these events happened decades ago.
Wells Fargo # 1
Wells Fargo is the biggest of the big! It is numero uno when it comes to mortgage production. It also offers a growing dividend yield of 2.55% and is priced near its 52-week high. But, before you go out and invest your hard-earned capital into this dividend stalwart, lets peel a few layers off the onion. Wells Fargo recently paid $175 million to the U.S. justice department to settle a race discrimination suit brought forth.
Within days, many believe in retaliation to the U.S. government, Wells Fargo shut down its entire U.S. wholesale channel. This channel was the largest channel of monies for independent brokers and bankers. Wells suggested that the brokers and bankers were at fault for the race discrimination suit and thus forced their hand to close the channel. Either way, the channel's closing makes U.S. banks even bigger. Closing the channel only cost Wells 5% of its total mortgage production, and cost independent brokers and bankers the largest source of funding available in the marketplace.
By closing the wholesale channel, Wells eliminates the competition (independent brokers/bankers), many of whom cannot survive in a marketplace that is already strangled by too few lenders prior to the Wells closing. I am not suggesting that Wells made bad loans. In fact, Wells was notorious for only accepting the best of the best loans from outside sources over the last 14 years. This is the primary reason this channel even survived the 2008 market crash. So make your own decision on why it closed it!
A Whales Tail
JPMorgan Chase and its $5 billion and climbing trading loss is no pre-2008 fairy tale. It's hard to imagine that this just happened. Our government appears to be more concerned that the mortgages are what really cratered the economy in 2008 and not the investment companies who bundled them up (good and bad loans) and sold them as AAA-rated securities to investors. Lets not forget who owns the investment companies—the banks! Since 2008, our government has spent its time issuing laws and regulations against the mortgage industry. We better watch out for more fish tails/stories around the corner.
Invest in U.S. Banks - Just say no!
Wells Fargo and JPMorgan Chase's recent issues and news continue to support why we cannot invest our capital into this sector. Instead of repealing the Gramm-Leach-Bliley Act of 1998 and breaking up the very issue that caused the 2008 crash and continues to throttle the markets even today, the U.S. government is attempting to control these "Too Big to Fail Banks" with over-regulation and laws on the lending industry. Sounds like smoke and mirrors to me, considering the elephant in the room is pretty obvious and the government for some reason wants the U.S. public to overlook it.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.