There Are Big Problems for the Biggest Banks

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Source: Thinkstock

Source: Thinkstock

Recently, one of the world’s largest financial institutions – JPMorgan (NYSE:JPM) — announced that the decline in its trading business is accelerating. As a result, the stock fell nearly 2.5 percent on Monday on high volume — 25 million shares. Shares in rival trader Goldman Sachs (NYSE:GS) fell in sympathy by 1.6 percent on what was a relatively flat day for stocks.

If you look at a chart of these two stocks for the year, a bearish pattern is emerging. We are seeing lower highs and lower lows, which means that investors are taking opportunities to sell or to short rallies. This is despite the fact that both companies trade at relatively modest valuations. JPMorgan trades at just 10 times this year’s earnings estimates and at less than its stated book value. The same can be said about Goldman Sachs.

These two companies aren’t the only large financials seeing negative sentiment. Bank of America (NYSE:BAC) saw its shares plummet early last week as the company announced that it would be suspending its stock repurchase program and keeping its dividend at a negligible penny per share each quarter. The company blames a $4 billion error. Citigroup (NYSE:C) recently failed a Federal Reserve stress test. Both stocks are technically very weak as it is underperforming the market, and like its peers JPMorgan and Goldman Sachs, it is making lower lows.

Ultimately, these problems are all interrelated. These companies are struggling because of new regulations resulting from the financial crisis of 2007 – 2009. The decline in trading revenues is resulting from tighter regulations limiting and dis-incentivizing trading in “exotic” derivatives and investments. The restrictions on Bank of America’s capital is the result of the government and the Federal Reserve restricting what banks can and cannot do with its capital. The fact that Citigroup failed a stress test will likely mean that it will face similar restrictions on its capital.

In short, the fallout from the financial crisis — even though it has been over for five years — is still at large. Banks face punitive restrictions, and it is also facing additional losses stemming from that era.

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