“Invest at your own risk” is my caveat to investors shopping in the United State’s financial sector. Despite expectations for the financial sector to lead our economy out of the subsiding recession, I am very much skeptical of the forthcoming earnings season in this sector. Wells Fargo and Goldman Sachs are two banking powerhouses that have released better-than-expected preliminary numbers for the first quarter and I believe many more banks will follow suit. My issue with all this good news is this: what’s the real story behind the earnings?
Should financial performance really be the determining factor for restoring credibility and stability in the banking system or should we look more into the intangibles? If we are only going by the numbers and not the risk management or other intangibles, then aren’t we only resetting the domino stack? I bring this up because Goldman Sachs’ reported earnings on Monday were highly positive due to their increased appetite for higher trading risks and self-imposed priority to prematurely return the government’s TARP loan. In essence, Goldman Sachs is so terrified of the government’s regulatory stronghold on bank holding companies that the company is essentially putting more money at risk in its trading activities in order to reap higher returns on investment and pay off it’s debt faster. The problem with this, other than the obvious potential losses, is that Goldman Sachs could consequently face damaging scrutiny from the government for alleged insider trading practices due to its overconfidence in the markets.
Profits and earnings do not equate to long term financial stability, but only short term wealth, and many of the world’s most successful banks are not always the biggest. This was very evident in the most recent list of global banks with the highest credit ratings in the world. An American bank holding company was nowhere to be found in a top 20 position but Wells Fargo came in for the home team at number 21. Banking conglomerates, Bank of America and Citigroup, did not make the top 50 list; JP Morgan Chase captured the number 45 spot. Although asset size was a factor in the ranking methodology, banks such as #18 ASB Bank (New Zealand) and #28 Pohjola Bank (Finland) with asset sizes of $45 billion and $38 billion, respectively, were ranked far more higher than some of their larger counterparts, including #44 UBS ($2 trillion) and #47 Credit Suisse ($1.2 trillion).
Size isn’t always the key and American banks must refrain from that mentality of “bigger is better” if credibility is to be restored in the global financial marketplace. Banks, especially investment banks, have flourished on the principles of better risk management and this practice must be revived in the American financial sector now more than ever as global competition increases.
Below is a list of some of the world’s safest bank holding companies along with their credit ratings:
May 6th, 2009 05:24
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May 4th, 2009 07:48
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April 14th, 2009 23:11
Interesting and valuable analysis. However, this crisis has also taught us that we need to be skeptical of ratings like those above from companies like Moody’s and S&P in general. We’ve now seen what can happen when profit-oriented ratings giants hold a monopoly on one of the largest factors considered in investing in a company. I think we now see the need for a bit of an incentive realignment in the relationship between companies seeking favorable ratings and the companies whose services are elicited and paid for by those firms looking for safe debt ratings.
Nevertheless, you bring up a very good point that assets don’t necessarily equal soundness. Just look at credit unions! (I’m biased seeing that I work at one).
Hope you had a good Easter.
April 14th, 2009 23:14
Great point. I was waiting for someone to bring that up and it is definitely true that the same ratings agencies got us in this mess.