In what finally seems to be a light at the end of the tunnel for many homeowners who were bushwhacked by the big banks during the 2008 financial meltdown, the federal government made its oversight presence known to some of America's largest financial institutions on June 7. The U.S. government made two separate moves, which demonstrated a strong presence amongst financial services companies. First, the Federal Reserve laid the groundwork for a stricter set of capital regulations for financial institutions with assets of at least $500 million. Second, federal regulators served a handful of financial firms with subpoenas that cited potential violations of FHA rules.
When the news broke that JPMorgan Chase (NYSE:JPM) lost what is now closer to $4 billion in derivatives trading, the Federal Reserve didn't take it lightly. As a result, it has implemented a fresh set of rules that state the banks must maintain a level of common equity equal to at least 4.5% of their risk-weighted assets and also have 2.5% set aside for a capital conservation buffer. The Fed also finalized rules specifically targeting banks that hold at least $1 billion dollars in complex financial derivatives. If JPM had those systematic regulations in place prior to the trades executed by Bruno Iksil the losses may not have been as bad as currently calculated. When the news broke with about an hour left in the trading day, Bank of America (NYSE:BAC), Citigroup (NYSE:C), and Goldman Sachs (NYSE:GS) all fell sharply. The sell-off was due to the fact that these banks won't be able to take as much risk as was once thought and their positions in such places as derivatives markets could become more conservative.
What does this mean to retail investors who felt the pain when JPM dropped over 10% due to the then $2 billion trading loss? Its means their investments are better protected from feeling the effects of such activity. In other words the 10% intraday loss could have been avoided if these rules were in place several weeks ago.
The moves by the Federal Reserve weren't the only government regulations cited during Thursday's trading session. Federal regulators issued subpoenas to U.S. Bancorp (NYSE:USB), MetLife (NYSE:MET), and SunTrust (NYSE:STI), for possible violations with regard to various FHA rules and regulations. U.S. Attorneys have already settled with Bank of America , Citigroup , Deutsche Bank AG (NYSE:DB), and Flagstar Bancorp (NYSE:FBC) for nearly $1 billion dollars in total.
I'd stay away from the big banks at these levels, and wait until any remnants of the mortgage crisis blows over before establishing a position. Even though the banks have seen some short-term growth as of late I still think they're too risky of a play until stability can be restore in financial institutions as a whole. Once the remaining banks can pay off their TARP loans and confidence is restored both from a risk perspective and mortgage perspective, then and only then would I consider a small to midsized position.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.