It's not a great time to be an American bank.
A confluence of events – many of which stem from the damage done during the worst days of the Great Recession – has led former giants like JPMorgan and Wells Fargo to take on a more defensive stance as they try to protect their revenue streams during a global economic slowdown. As we'll detail in today's article, several problems have combined to create significant – and perhaps business-threatening – headaches for the U.S. financial system.
One of the major issues is the fact that the mortgage industry – especially the refinance edge – has been choked into obscurity by the rise of interest rates. Because of the increase, they are less attractive to consumers, even those who would actually benefit from a restructured deal. Mortgage activity has cratered over 60 percent since the beginning of 2013, according to The Wall Street Journal. This has forced some of the biggest banks, including Wells Fargo, to shed some of their mortgage-processing employees as they shore up its operations. While this hasn't led to significant pressure in the S&P 500, the reality is that this is a side of its business that Wells Fargo can't afford to have fail.
JPMorgan's problems are more complex. Since the London Whale debacle, Jamie Dimon's mega-bank has been hit on all sides by lawsuits and shareholder scrutiny. It suffered its first-ever quarterly loss, driven mainly by a whopping $9.2 billion in legal expenses incurred due to its allegedly fraudulent actions in the mortgage market in the pre-Great Recession days. The bank's image has also taken a dive because of Dimon's behavior, particularly his public declarations that the country's biggest banks need less, not more, regulation. After the London Whale cost the bank over $1 billion, his influence seems to have waned and the quarterly loss doesn't help his standing at all.
Does this mean that the U.S. financial system is in trouble? Not necessarily, but it's definitely a bad sign for the industry when its top performers are publicly bleeding money. Investors need to prepare for potential volatility and market corrections, which can be accomplished by using portfolio management tools like SmartStops to adjust and shift positions when necessary.
Categories: Risk Management, Trading & Portfolio Strategies