With the upcoming new year, let's take a brief moment to reflect on the reality of investing today in the nation's largest banks. These banks are big. They are complex. And some are decently run companies. But the one thing that really links them, other than their gargantuan size, is risk.
Flashback to 2006
At year-end 2006, the six largest U.S. banks controlled $4.5 trillion in total assets. Bank of America (NYSE:BAC) was the largest bank in the nation back then at $1.196 trillion, followed closely by JPMorgan Chase's (NYSE:JPM) $1.179 trillion.
The rest of the top six rounded out like this:
|Bank||Total Assets 12/31/2006|
|3. Citigroup (NYSE:C)||$1.0 trillion|
|4. Wachovia Corp||$518 billion|
|5. Wells Fargo (NYSE:WFC)||$399 billion|
|6. US Bancorp (NYSE:USB)||$218 billion|
How the times have changed!
Soon after, the real estate bubble collapsed, the world was thrust into a financial crisis, and the stock market collapsed in a full-on panic. At the center of the storm were these large banks.
Their complexity was too much to understand, much less to manage. In the span of hours, the landscape of the megabanks changed.
After the dust settled, here's how the largest U.S. banks looked:
|Bank||Total Assets 9/30/2014|
|1. JPMorgan Chase||$2.5 trillion|
|2. Bank of America||$2.1 trillion|
|3. Citigroup||$1.9 trillion|
|4. Wells Fargo||$1.6 trillion|
|5. Goldman Sachs (NYSE:GS)||$869 billion|
|6. Morgan Stanley (NYSE:MS)||$815 billion|
Wachovia? Gone, absorbed into Wells Fargo.
The investing banking firms of Lehman Brothers and Bear Stearns? Gone, bankrupt, and broken into pieces for the former, while the latter was absorbed into JPMorgan. Goldman and Morgan Stanley remain standing, but only after converting into bank holding companies in September 2008.
Altogether, these banks now control $9.9 trillion in assets, more than double the total from 2006 and more than half of the entire industry's assets. Bank of America and JPMorgan alone control more than the top six did eight short years ago!
The biggest losers in this whole fiasco were the shareholders. Take a look at this chart of share price change of these big banks alongside the S&P 500:
Of all the companies discussed so far, only Wells Fargo has managed to match the S&P 500 since 2006. That's seven of the largest financial institutions in the U.S. -- and all but one have lagged the market. Bank of America and Citigroup together have lost billions and billions of wealth for investors during this period, down 67% and 90%, respectively.
Was the financial crisis and great recession an abnormal and extreme example of an economic downturn? Sure... it was horrible. But the severity of this one recession doesn't preclude the next one from being the same, or worse. If anything, the banking industry today has a higher concentration of assets, and is more systemically intertwined.
I'm not saying that you should avoid investing in bank stocks. Regulators and governments are working very hard to add safeguards to the system to mitigate many of these risks -- though many of these same regulators fear the system is just as fragile, if not more, than it was pre-crisis.
I am saying that, as investors, we can't blind ourselves to the risks we face in the markets, in specific industries, and in specific companies. In my opinion, these mega bank stocks are particularly risky for long-term investors.
Jay Jenkins has no position in any stocks mentioned. The Motley Fool recommends Bank of America, Goldman Sachs, and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup Inc, 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.