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Why Warren Buffett is Wrong About U.S. Banks

By , Money Morning -

Warren Buffett has made billions since the financial crisis by investing in U.S. banks, including Bank of America (NYSE: BAC),

Wells Fargo & Co. (NYSE: WFC) and Goldman Sachs Group Inc. (NYSE: GS).

The Oracle of Omaha has even guaranteed the safety of U.S. banks.

"The banks will not get this country in trouble, I guarantee it," Buffett told Bloomberg News. "Our banking system is in the best shape in recent memory."

Buffett, CEO of Berkshire Hathaway (NYSE: BRK.A, BRK.B), says U.S. banks are safe because they have increased capital ratios, sold risky assets, cut unnecessary jobs and bolstered their balance sheets.

But while the U.S. banking system might be in better shape than it was five years ago, it is nowhere near fixed. And banks could cause another crash.

Here's why.

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Goldman Sachs Group Inc. (NYSE: GS) Earnings: How the Mighty Have Fallen...

By , Associate Editor, Money Morning -

The Goldman Sachs Group Inc. (NYSE: GS) earnings report released before the bell today (Wednesday) is one of the most dramatic examples of how U.S. banks are struggling to return to healthy profitability and revenue growth.

Goldman Sachs earnings came in at $1.84 a share, 58% lower than the same quarter last year. Revenue fell 30% to $6.05 billion.

Though dismal, the earnings beat analysts' estimates, which were as low as 70 cents a share - an 82% drop from last year's fourth quarter and a far cry from the whopping $8.20 a share in 2009.

"It looks like nothing's working right now," Jack Kaplan, portfolio manager at Carret Asset Management, told Reuters. "They were below expectations on virtually everything on the revenue side."

This was the second-lowest quarterly revenue for Goldman Sachs since the financial crisis, as U.S. banks' earnings continue getting squeezed from a weak global economy and increased regulation.

Another Disappointing Quarter for Goldman Sachs Earnings

This was the fourth consecutive quarter of declining revenue for Goldman Sachs.

The third quarter of 2011 was especially painful, with Goldman's revenue down 47.9% from 2010's third quarter. Goldman reported a loss of $428 million, compared to a $1.74 billion profit from the year before.

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It's Time to Bail on Bank Stocks

By , Money Morning -

There was a time when bank stocks actually looked like good investments. And many, having racked up big gains over the past two years, proved to be just that.

But sadly, U.S. banks no longer offer the value and profit-making potential they did immediately following the financial collapse. In fact, they're actually heading for what could be a catastrophic decline.

Let me explain.

On February 18, 2009, I wrote a piece that said bank stocks should not be written off.

I observed at the time that the best U.S. banks had huge business strengths that were not fully undermined by the financial crisis. So I advised investors buy shares of the best among them.

As it turns out, that recommendation may have been too timid.

That is, most bank stocks - including some of the weakest and least investment-worthy - have surged since my article's publication.

Even following a lukewarm second quarter and last week's market meltdown, the top six banks - Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC), JPMorgan Chase & Co. (NYSE: JPM), Wells Fargo & Co. (WFC), Goldman Sachs Group Inc. (NYSE: GS), and Morgan Stanley (NYSE: MS) - are in a relatively impressive position.

Take a look for yourself:

  • Goldman Sachs stock is up about 22%.
  • Bank of America is up 30%.
  • JPMorgan is up about 49%.
  • And Wells Fargo is up 55%.
Only Citigroup, down about 13%, and Morgan Stanley, down 20%, have seen their stock plunge.

But in light of this remarkable run up, and the disastrous pitfalls that lie ahead, now is the time to bail on bank stocks.

Margins are narrowing, government regulation is increasing, and the outlook for big deals is drying up.

In other words: The risks related to bank stocks are as present as they ever were - just the profitability is missing.



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