This week Wall Street’s big investment banks will report on how they did in Q4 2012, and while they won’t be reporting the train wreck numbers that made the financial crisis so… exciting, there are a few stories to watch that could make a major impact on the world of finance.The banks to watch this week are Morgan Stanley, Bank of America and JP Morgan.
Morgan Stanley’s earnings mean we’ll get an idea of what bank CEO James Gorman’s “tough times mean change” philosophy is doing to make his company more competitive. At Bank of America, it’s time to take a hard look at legal fees. And at JP Morgan, the London Whale could take a bite out of CEO Jamie Dimon.
First up, Morgan Stanley. Last week, the bank announced that it would axe 1600 jobs starting today. Coming from James Gorman’s firm, that shouldn’t surprise anyone. Sure, the mass layoffs of 2009 and 2010 seem to have abated, but Gorman has always been outspoken about his belief that the business of banking is changing and Wall Street has to change with it — it’s adapt or die.
Gorman has even attacked compensation saying that the Street has “too many overpaid bankers” and cut his bank’s pay pool by 9% last year.
It doesn’t necessarily look like investors are being reassured by this tough talk. Morgan Stanley’s stock has been relatively flat for the last year having crawled back from a serious beating starting in May after the Facebook IPO disaster (MS was lead underwriter).
Bottom line: We’ll see if MS earnings reflect what Gorman thinks about the new Wall Street.
Then there’s Bank of America, where the story is still all about cash and legal fees.
Back in October, CEO Brian Moynihan declared victory over everyone who doubted whether or not his firm could amass enough cash to build a strong balance sheet.
“We’re going to officially declare victory on one of those operating principles,” Moynihan said in the town-hall style meeting. “The reason why is, we have the top capital in the industry, the top liquidity in the industry.” People have stopped asking if the bank needs more funds to absorb losses and now want to know when investors will get the excess, he said.
Yes, after selling assets like crazy, after receiving a $5 billion cash injection from Warren Buffett last year, Bank of America is ready to increase its dividend.
Maybe. While Moynihan was sounding optimistic, bank analyst Meredith Whitney was raining on his parade. “This is going to be an endless beat down for the banks in terms of legal claims,” she told CNBC.
Since the financial crisis, Bank of America alone has paid out $50 billion in mortgage related legal fees and it’s not over yet.
And what’s most important about that, as Fortune’s Stephen Gandel pointed out after the bank agreed to pay out an $11.6 billion settlement to Fannie Mae last Monday, is that Bank of America has consistently underestimated the amount of money it has to pay out in legal fees… by a whole lot.
…bank reserves, and in particular legal reserves, are murky. Banks only give a total amount, and not what goes into that calculation. It’s the ‘trust us’ approach. And at least in BofA’s case, it’s not clear investors should. Take the Fannie settlement. BofA said it had not previously reserved for $2.7 billion of the deal. The bank is paying Fannie $11.6 billion, but that includes buying back nearly $7 billion in loans. Many of those loans may be worth as much as half of their original value. So out of a roughly $7.8 billion deal (final cost), BofA had put only 65% of the settlement aside. By that maths, BofA’s $16 billion reserve fund for these types of deals should really be more like $24 billion.
In all, BofA had set aside $6.4 billion, or enough to cover just 55% of the cost of the all the legal settlements and losses the bank announced on Monday.
Last quarter, Bank of America estimated its total Fannie losses as $1 billion (obviously not enough), and part of their latest settlement last week was adding $900 million more to its legal reserves.
Fine, but another mortgage related suit filed by the Justice Department in October could cost the bank another $1 billion.
Then there’s the suit AIG filed this weekend. The insurer is suing the NY Fed just to find out if they have a right to sue Bank of America for bad residential mortgage-backed securities it bought from Countrywide before the financial crisis.
If the Court says yes, AIG could seek another $7 billion from Bank of America.
We’ll see if the bank is accounting for all of that on Thursday.
The last story to watch is at JP Morgan. This weekend Bloomberg reported that the bank is circulating a report that blames CEO Jamie Dimon for the bank’s massive $6.8 billion “London Whale” trading loss last year.
The board will decide whether or not to release that report to the public today. For his part, Dimon has said he wants to “let it all hang out.”
Still, this would be a fall from grace for Dimon. He’s widely considered the most competent banker on Wall Street, and he’s definitely the highest paid. He received $23 million total pay in 2011, including a $4.5 billion cash bonus. The board has already decided that his bonus will be cut this year because of the trading loss.
Tomorrow, we’ll see if it gets any worse than that.
All that said, here’s the schedule for earnings this week:
- Tuesday: JP Morgan
- Wednesday: Goldman Sachs
- Thursday: Bank of America
- Friday: Morgan Stanley
All of this goes down before the bell, so wake up early.