Banks and the Fed Dodged a Few Bullets This Week

Janet Yellen's first Congressional testimony as Fed chair goes well, while Bank of America and Citigroup pay out, JPMorgan Chase hits a roadblock, and Wells Fargo relaxes its standards.

Feb 14, 2014 at 2:00PM

Janet Yellen, for one, is probably relieved that this work week is just about over. In a Baptism by fire, the freshly minted chair of the Federal Reserve testified before both the House and the Senate. All in all, she did pretty well, keeping her poise and essentially vowing to continue predecessor Ben Bernanke's policies. This is the music that the financial industry wants to hear; predictable, steady, and soothing, with few jarring notes.  

As with her testimony, there was no excessively good or bad news to jar the nation's major banks over the past few days. Bank of America (NYSE:BAC) made some encouraging noises regarding its investment banking arm, Merrill Lynch. At the Credit Suisse (NYSE:CS) Financial Forum in Florida John Thiel, Merrill's head of U.S. wealth management and the private banking and investment group, said his unit could hit a pre-tax profit margin over 30% once interest rates "normalize," i.e. rise. That would add nicely to Merrill's contribution to its parent's bottom line, as the wealth management unit's margin came in at 26% for the entirety of 2013.

Meanwhile, Bank of America announced its latest quarterly dividend. At $0.01 per share it's not going to make anyone a millionaire, but if a penny distribution helps keep investors in the stock, then it's a sufficient payout. Besides, Bank of America isn't the only incumbent doling out an Abe Lincoln coin -- Citigroup (NYSE:C) has paid that amount every quarter since January 2009.

Citi, for its part, is opening its coffers for another group of people. Earlier this week it settled a class action lawsuit that maintained the bank overcharged several thousand homeowners for force-placed insurance (a policy taken out by a lender on a piece of property when it seems a borrower cannot or will not continue to carry required homeowner insurance). The settlement will see the firm pay out around $110 million to put the suit to rest. This seems like money well spent considering the many legal skirmishes being waged by the nation's big banks -- the fewer of these, the better.

Case in point: JPMorgan Chase's (NYSE:JPM) massive $13 billion settlement reached last November with the government over the bank's conduct in the sale of crisis-era mortgage-backed securities. Apparently this deal isn't good enough for something calling itself Better Markets, a non-profit advocacy group. Better Markets filed a lawsuit against the Justice Department challenging the constitutionality of the arrangement, saying that it feels the firm received "blanket civil immunity" in the deal. Sigh. Perhaps we're at the start of a financial horror story, The Giant Settlement That Wouldn't Die.

Elsewhere in big banks, an intriguing report from Reuters has it that Wells Fargo (NYSE:WFC), the current no. 1 mortgage lender in the nation, is creeping slowly back into sub-prime housing loans. According to the article, Wells is trying to make up for declining mortgage volume by reducing its creditworthiness threshold. Apparently it will lend to clients with credit scores as low as 600, down from the former limit of 640. Although this will provide opportunities for some deserving borrowers to get the financing needed for a home, it's going to lift the bank's overall risk at least a little. As such, the situation is worth keeping an eye on to see how it develops.

Venturing across the Atlantic, the big American banks active on the European market -- basically all of the above-mentioned save for Wells Fargo -- could be looking at a slightly better-than-expected future. Eurostat, the European Union's statistics arm, reported that eurozone GDP grew by 0.3% on a quarter-over-quarter basis in Q4, narrowly exceeding the average forecast by ten basis points.  That's not a huge beat, but at this point any upside surprise is welcome as far as the economically challenged continent is concerned.

At any rate, those U.S. financial majors have plenty on their plate. It's a good thing that the new Fed honcho isn't roiling the markets and doesn't seem to be inclined to; the big banks have plenty of business to attend to without worrying about her moves.

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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