This was a particularly interest-ing week in banking. The market rose on news that the robust global economy may keep us out of a recession after all. The debate is heating up as to whether it is time to buy financial stocks or avoid them like rush hour. And, banks downgraded earnings projections of other banks.
- Bank stock profits were down 46% in the first quarter as banks and thrifts set aside $37.1 billion to cover losses. Three banks have failed so far this year, and the FDIC is bracing for more. But the good news is that the first quarter was an improvement over the nasty fourth quarter. I guess the news is improving. Maybe one of these quarters bank profits won’t decline.
- The Bear Stearns (NYSE: BSC ) demise is official. The 85-year history of the great investment bank ended Thursday morning when shareholders approved the JPMorgan Chase (NYSE: JPM ) buyout with an 84% “yes” vote. The buyout was approved at $10 per share. The stock had traded at $171 per share in January 2007, before the subprime crisis took hold. Bear Stearns Chairman James Cayne said, “There’s no anger; there’s simply remorse.”
- MasterCard (NYSE: MA ) raised profit projections ahead of an analyst meeting, and the stock soared 8% on the news. Good for MasterCard! The credit card giant said it is seeing better-than-expected profits driven primarily by international business. The news tells us two things. First, a great financial company can still make money in this market. Second, the global economy is a strong and powerful force that might very well save us from the clutches of recession.
- Analysts at both JPMorgan and Bank of America (NYSE: BAC ) cut second-quarter earnings estimates for Goldman Sachs (NYSE: GS ) , Lehman Brothers (NYSE: LEH ) , and Morgan Stanley (NYSE: MS ) . Both firms’ analysts cited slow client activity and more write-offs. Then Goldman Sachs cut second-quarter earnings estimates for JPMorgan. Now, Goldman and Morgan Stanley aren’t speaking, and Lehman said Bank of America is not its friend anymore.
- A Wall Street Journal article suggested that several major money center banks may have caused understated LIBOR rates, the average rate at which banks lend to each other. The article said that the banks might have deliberately low-balled borrowing costs to avoid looking desperate for cash. You know, if I were a crooked bank executive, I would do something illegal now. In this environment, who would notice? It’s a freebie.
News of the fascinating financial times in which we live continues next week. Who knows? There could be news that will change the market and the world forever. Stay tuned.