The Ghost of the Financial Crisis Is Stalking Banks This Week

The troubles of the last decade will impact the market this week, with Bank of America, Citigroup, and JPMorgan Chase hauled before court for alleged manipulation of the LIBOR rate. Crisis-era scapegoats Freddie Mac and Fannie Mae might disappear, which apparently doesn't spook Wells Fargo, as it's aiming to raise its dividend.

Mar 17, 2014 at 11:00AM

Call it The Spirit That Won't Die. The financial crisis, now more than five years in the past, still haunts the markets and occasionally scares the wits out of the financial sector. This will be very much apparent this week, as ethics-stretching behavior and notorious names from the era return from the unloved past.

In the latest addition to an ever-lengthening list of legal actions arising from practices during that time, the Federal Deposit Insurance Corporation is suing a cabal of banks. This time, their alleged malfeasance during that era is manipulation of the LIBOR, a benchmark lending rate. This isn't the first LIBOR-related case, but it's one of the biggest, with 12 banks headquartered in three separate continents being named in the lawsuit.

The list for the U.S. is comprised of Bank of America (NYSE:BAC), Citigroup (NYSE:C), and JPMorgan Chase (NYSE:JPM). In terms of the foreign biggies, Deutsche Bank, HSBC, and Bank of Tokyo-Mitsubishi have all been targeted in the suit.

Two other entities that absorbed some of the blame for the financial crisis, mortgage packagers Freddie Mac and Fannie Mae (NASDAQOTCBB:FNMA), will make the headlines this week. A few days ago, the Senate released the first draft of a proposal to eliminate both organizations, replacing them with a single new system tying together private-sector management and investment with oversight from the government.

Over the past few years, banks have been feeling the ghostly fingertips of the crisis in the form of the Federal Reserve's Dodd-Frank Act stress tests. A creature of the post-crisis climate of mistrust in major financial institutions, the tests are a set of reviews the Fed conducts of the country's largest financials in order to gauge the health of their businesses. The first set of results from the tests will be released this Thursday.

Meanwhile, next Wednesday will see perhaps the more important element of the process -- the Comprehensive Capital Analysis and Review. This is a sprawling examination that will include the Fed's crucial yays or nays to banks' capital distribution plans.

With the results coming in, expect some action in banking stocks, particularly on speculation as to whether their existing dividend payments and/or share repurchase schemes will be increased. This is a more than likely scenario, as some have been handing out meager distributions for a long time now -- Citigroup and Bank of America, for example, each dispense $0.01 per quarter  -- while doing gangbusters in terms of recent financial results. 

One bank that has specified exactly how it wants to spend its spare money is Wells Fargo (NYSE:WFC). Last month, the company's CFO Timothy Sloan said bluntly that for the upcoming CCAR the bank "requested an increase in our dividend and share repurchases as compared with the 2013 Capital Plan."  

Dividend hikes are always welcome, and if enacted they should continue to pump good sentiment into the banking sector. Which could use it, after all; that nasty ghost is bothersome and it doesn't seem to be willing to float away anytime soon.

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Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo, and owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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