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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.

To continue reading, please click here...

I Admit It, I Was Wrong About Regulation

By , Capital Wave Strategist, Money Morning • @WallStreet_II -

Like most people, I hate to admit it when I'm wrong. But today, I admit it.

I have been wrong about regulation. All wrong. I've been calling for more, better regulations to stem the fraud and wicked ways of errant Wall Streeters.

But it's come to light, in a sad and almost tragic way, that this whole regulation thing is wrong from the get-go.

After all, it ruined one poor man's near-perfect life. And that's where I draw the line.

Thanks to a suicide note, penned before (obviously) his attempted mea culpa exit stage left, which thankfully failed, we know why poor Russell Wasendorf Sr. was so distraught.

Yeah, that Russell Wasendorf Sr., the guy who founded and was CEO of failed brokerage house Peregrine Financial, also known as PFGBest.

Well, it turns out poor old Russ actually is poor - "poor," as in he has no more money (still has that jet and a few other little assets, however) - and his firm is being liquidated because of those stupid, useless regulations and those horribly pesky regulators.

According to Russ' suicide note, for almost 20 years, he ripped off his clients by stealing their money to keep his firm afloat so he could continue to service them, his clients, that is... and the regulators.

Now, that's what I call service!

To continue reading, please click here...

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Smaller U.S. Regional Banks Fast Becoming Takeover Targets

By , Contributing Writer, Money Morning -

Sharks are circling the beleaguered financial services industry and the upshot may well be a wave of mergers and acquisitions (M&A) that analysts say could lead to higher valuations, especially for smaller, regional banks.

Activity in the financial services industry has been subdued for the past three years as weak loan growth, shrinking profit margins, increased regulation and low valuations kept investors at bay. But now forces pressuring the industry to contract "will create more willingness to sell from bank management teams and board of directors over the next year," and drive consolidation, according to the report by Credit Suisse Equity Research.

Specifically, weak U.S. regional banks could be attractive targets for Canadian banks looking to expand their U.S. holdings, the report said.

Read More…

Big Banks May Be Forced to Buy Back Bad Mortgage Loans

By , Contributing Writer, Money Morning -

Major U.S. banks are under pressure from government officials, as well as groups of investors and insurers, to repurchase or modify bad mortgage loans they pooled into securities and sold to unwitting buyers.

In the latest effort, a group of investors with roughly $500 billion invested in 2,300 mortgage securities is trying to force the large banks that originated or are now servicing faulty subprime-mortgage loans to repurchase or modify them, The Wall Street Journal reported.

Some investors "had no idea that their money was being invested in mortgage-backed securities," Dallas-based attorney Talcott Franklin told The Journal. "And yet somehow these people are now the ones being punished, and that's just not right."

Read More…

JPMorgan Shuts Prop Trading Unit as Banks Maneuver Around the Volcker Rule

By , Contributing Writer, Money Morning -

JPMorgan Chase & Co. (NYSE: JPM) became the first investment bank to take steps to comply with the so-called "Volcker Rule" by shutting down its proprietary trading unit.

JPM, the second-biggest U.S. bank by assets, told about 20 traders who work on its commodities trading desk that the company will close the unit, Bloomberg News reported, citing an anonymous source.

The bank eventually will close all in-house trading to comply with new U.S. curbs on investment banks, said the person, who asked not to be identified because New York-based JPM's decision hasn't been made public.

Read More…

Stocks Stuck in Trading Range Despite Positive Earnings Reports

By , Contributing Writer, Money Morning -

Despite positive earnings reports last week from more than a few bellwether companies, stocks remain stuck in a trading range that continues to test investors' patience and skill.

Stocks launched higher last week in another round of the hyper-volatile action that has plagued the equity markets over the last three months. The good news is that some technical resistance was knocked out in the process, potentially setting the stage for a bigger rally in weeks to come.

The not-so-great reality: Stocks remain mired in the same range that has boxed them in for the past three months because, let's face it, despite their strong move they really only ended the week a fraction above where they started the previous week.


 

Read more about which stocks are leading the pack...

Why Second Quarter Earnings Haven't Spurred a Stock Market Rally

By , Contributing Writer, Money Morning -

Second quarter earnings season is in full swing on Wall Street and investors are keeping a close eye on corporate profits.

But rather than pinning their hopes on earnings for relief from the recent downturn in stocks, investors seem to be suffering from tunnel vision. They're ignoring numerous positive earnings reports and instead focusing on macro-economic trends to determine the day-to-day fate of the markets.

And as a slew of economic reports continue to display conflicting trends, investors are finding it difficult to read the tea leaves. So far this earnings season, the market and the investors that drive it are all over the place.

The result has been a string of volatile trading days featuring gyrating and erratic stock trading. 

Read More…

Goldman Joins Chorus of Big Banks Reporting Weaker Earnings

By , Contributing Writer, Money Morning -

Goldman Sachs Group Inc. (NYSE: GS) joined a chorus of big banks reporting weaker earnings for the second quarter as a weakening economy led investors to refrain from making deals.

Goldman's earnings plummeted 82% in the second quarter, hammered by the investment bank's settlement of Securities and Exchange Commission (SEC) fraud allegations and the U.K. tax on bank executive bonuses.

Strong trading and bond underwriting had bolstered the company's first-quarter results. But markets began to gyrate in April, and investor nervousness increased after the "flash crash" in May. Volatility has continued to rock the markets throughout the summer with investors' ongoing concerns about economies in Europe and fears that the U.S. recovery might be stalling.

Read More…

Money Morning Mailbag: How Will New Accounting Standards Affect U.S. Banks and Investors?

By , Associate Editor, Money Morning -

The Financial Accounting Standards Board (FASB) last month proposed an overhaul of accounting standards that would require U.S. banks to record their loans at current market value, giving investors a clearer picture of the banks' financial standing.

The proposal is an effort to tighten banking regulation and improve financial transparency, and coincides with Congress finalizing financial reform.

News of the possible policy change prompted this reader to weigh in on what its enforcement, which has been pushed back to as late as 2013, could do for the banking industry:

"Convergence" between U.S. accounting practices and international accounting practices (from the International Accounting Standards Board) is to be implemented in one year. As part of this convergence, U.S. banks must soon begin to revalue (lower) assets on their books at current market value (mark-to-market).

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JPMorgan Posts Big Gains but Financial Reform Threatens Profitability

By , Associate Editor, Money Morning -

JPMorgan Chase & Co. (NYSE: JPM) posted a 55% rise in first-quarter net income led by fixed-income trading and investment banking. But to ensure its profits remain in tact, the bank continues to fight against proposed financial reform.

JPMorgan, the second-largest U.S. bank by assets, beat analysts' estimates with net income of $3.33 billion, or 74 cents a share. Estimates averaged 64 cents a share.

Investment banking brought in $2.47 billion, 74% of total net income. The area is usually a strong contributor to profits, kicking in 57% in the previous quarter and 75% in the first quarter of 2009.

JPMorgan claims the results are a strong indication of global financial economic improvement.

Read More…

New Banking Regulations … Same Old Story

By , Capital Wave Strategist, Money Morning • @WallStreet_II -

U.S. banks, drunk with greed, drove the nation's economy to the brink of financial Armageddon.

To save U.S. banks from losing their license to dangle the nation's economy over a cliff, the U.S. Federal Reserve and the country's elected elite threw them a bailout party and gifted them with the accounting- world's version of "Transformers. "

Unfortunately, new banking regulations aimed at solving these problems are little more than the same old song and dance that forced the bailout - and stuck U.S. taxpayers with a multi-trillion-dollar tab.

To see how reformers have failed to fix the banking system,

please read on...

AIG Could Seek Another Bailout as it Struggles to Return to Profitability

By , Associate Editor, Money Morning -

American International Group Inc. (NYSE: AIG), the insurance giant that received billions in federal bailout money, on Friday reported an $8.9 billion fourth-quarter loss. AIG dismissed the loss as part of its rebuilding process, but it also acknowledged that it may require even more government financing.

The loss is not nearly as bad as the previous year's $61.7 billion fourth-quarter stumble - the biggest quarterly loss in corporate history - but at $65.51 a share, it's still much higher than analysts predicted.

Amid scrutiny, AIG in September 2008 received a $182.3 billion bailout, which gave the government an 80% stake in its business. Since then, AIG's debt pay-off funds have generally come from the sale of its non-core assets. AIG recognizes these "fire-sales" as the best way to pay back its debts while also streamlining its business.

Read More…

How "Hot Money" is Wrecking the U.S. Banking System…

By , Capital Wave Strategist, Money Morning • @WallStreet_II -

When the Federal Deposit Insurance Corp. (FDIC) released its list of "problem banks" this week, 702 institutions holding $402.8 billion in assets were found to be in trouble.

That's the longest list in 17 years, and it's only going to get worse. In fact, regulators are expecting the number of troubled lenders to grow at an accelerating rate this year. They claim that an uptick in commercial-real-estate losses will serve as the key culprit

But the real culprit - the one that regulators won't talk about publicly - is the funding scheme banks employ to load themselves up on speculative loans. T his scheme - far removed from most investor radar screens - has played a major role in the banking sector's growing woes, and will continue to contribute heavily to bank failures in years to come.

  • The centerpiece to this risky strategy is a funding vehicle known officially as a "brokered deposit." However, due to the narcotic-like effects brokered deposits can have on a bank's balance sheet, industry insiders have adopted a more-appropriate moniker - referring to them as "hot money."
To discover more about the risks posed by "hot money,"

read on...

Plans to Hide Commercial Real Estate Losses Won't Avert a Double-Dip Downturn

By , Capital Wave Strategist, Money Morning • @WallStreet_II -

Sooner or later, mounting losses on commercial real estate could crash through the market's 2009 optimism and send the economy and stocks into a double-dip downturn.

The major problem is that lawmakers and regulators are setting up investors into believing that commercial real estate (CRE) losses are being effectively addressed. The truth is that escalating losses are being hidden as part of a campaign of optimism in a desperate gamble that a robustly reviving economy will save the day.

To protect yourself from another investment beating, here's what you need to know.



To find out how to avoid the commercial-real-estate implosion, please read on...

It's Time For "Banks" to Stop High-Risk Trading

By , Capital Wave Strategist, Money Morning • @WallStreet_II -

When members of the Senate Banking Committee recently asked Paul A. Volcker how regulators would identify banks engaged in excessive, high-risk trading, the former U.S. Federal Reserve chairman quipped:  "It's like pornography - you know it when you see it."

Volcker wants to make it illegal for banks to engage in such high-risk activities as "proprietary trading" - when an institution trades for its own accounts, as opposed to making trades for customer accounts. But as Volcker's comment illustrates, the proposal - known as "Volcker's Rule" - the whole concept of high-risk trading is pretty hazy and hard to define.

Just as hazy is the definition of what now constitutes a bank.

Long gone are the elegant subtleties of form and finesse that once defined the bank. In recent years, the entire concept has been cheapened by the vulgar obviousness of grossly enhanced compensation schemes.

No company better embodies this transformation than Goldman Sachs.

To find out why high-risk trading should be banned, read on...

Read More…

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