On Wednesday, August 15, both Nomura Holdings (NMR) and Bank of America (BAC) upgraded shares of Standard Chartered Bank (SCBFF.PK), and in most cases, I wouldn't have a problem with it, except in this case, it happens to be two highly scrutinized banks upgrading yet another highly scrutinized bank and with that I have a very big problem. Why do I have a problem with such a recommendation? There are three very clear reasons.
First, I strongly believe there is a clear and concise conflict of interest when one bank upgrades another bank, and I understand they are the investment units of these banks giving such recommendations, but if you think about it, its similar to the idea of one biotech company recommending a joint venture partner or research and development counterpart, it just doesn't make any sense and the recommendation is therefore considered to be tainted or biased.
Second, given the recent track records of both NMR and BAC, they shouldn't be allowed to recommend any other financial institution to potential shareholders until they're seriously cleaned up and in turn change their internal practices which include but are limited to the refinancing and structuring of residential and commercial mortgage loans, the robo-signing of loan documents, derivatives trading in an effort to off-set risk and debt, and any other practice of which these banks have in engaged and been cited for by the proper State and Federal regulatory authorities.
Lastly, I think the recommendations are a slap in the face to not only the Federal Reserve and the Office of the Comptroller of the Currency, but to the New York State Department of Financial Services who managed to uncover the activity of Standard Charted Bank with regard to their financial dealings with the nation of Iran. The sanctions imposed by the United States against Iran have been clear as day since the hostage crisis that spanned 444 days and affected the lives of so many Americans in the early 1980s, which leads me to ask my next question. What gives Standard Chartered the right to clearly attempt to bypass such sanctions, knowing that the punishment could result in severe civil and possibly even criminal charges? Nothing gives them the right. Assets should be frozen, individual transactions should be screened, and licensed should be revoked. Financial institutions such as Bank of America and Nomura shouldn't be recommending the stock to anyone, when in fact they've engaged in activity that is clearly questionable from a regulatory standpoint. Based on their recommendations it's almost as though they are condoning such activity, to the point where, slaps on the wrist (such as Standard Chartered Bank's $340 million settlement, Bank of America's $8.5 billion settlement, and the insider trading scandal that has led to the resignation of the CEO and COO of Nomura) are a consequence everyone can live with.
Should potential investors consider a position in Standard Chartered Bank, Bank of America or even Nomura at current levels? If they were to consider such a position, I'd do so by shorting all three companies. The near-term outlook doesn't look bright and is filled with nothing but continued uncertainly and a mountain of questions that could result in various near-term sell-offs. For long term investors looking to establish a position in the financial services sector I'd stick with REITs such as Chimera Investment Corp. (CIM) from an income perspective and traditional S&L banks such as New York Community Bancorp (NYB) from a growth perspective.
Disclosure: I am long CIM, NYB.