Thoughts on the U.S. Banking Industry

The global recession is widely blamed on U.S. banks, although only a handful are actually active internationally or have allowed open-ended investments in complicated financial instruments like derivatives and mortgaged-back securities. Once proud Wall Street-based investment banks have closed or assumed commercial status as bank holding companies, Goldman Sachs being the prime example. But household names like Bank of America, Wells Fargo, and Citicorp are still around, possibly too big to fail, apparently willing to accept government assistance in the form of TARP (Troubled Asset Relief Program) funds to facilitate uninterrupted lending to responsible businesses and individuals. Some overseas banks have hardly fared so well in the present economic climate. For instance, Iceland's three large banks recently had to be nationalized. Moreover, banks in Germany, France, and Switzerland, among others, carry much more debt on their books than do U.S. banks. Yet, the troubles here affected the financial situation in many other countries, derailing capital markets and upsetting international trade. The Federal Reserve, like other central banks, has attempted to handle the crisis with increased oversight and injection of billions of dollars for stimulus and recapitalization. Subjecting the top banks in the nation to a so-called stress test, an evaluation of strength in the event of a continuing recession, is the latest effort to shore up confidence in the system.

First quarter results for Charlotte, NC-based Bank of America and San Francisco's Wells Fargo were better than expected, leading many to anticipate that the two banking giants will pass the stress test. Others think Bank of America will likely need additional capital to meet the government's new standards. Citicorp's earnings report was not so upbeat, so the New York City-based bank also may need to raise more capital or face further government intervention. A shareholders' meeting for Bank of America attracted much attention and standing-room-only attendance, with the ouster of CEO Ken Lewis as Chairman of the Board as an unexpected result. The recent costly acquisition of investment management concern Merril Lynch and public outrage at reportedly excessive executive compensation are probable factors in the shareholders' vote. Wells Fargo, which won a very public takeover struggle for ailing Wachovia banking company against Citicorp, also had a crowded shareholders' annual meeting recently. Its CEO John Stumpf does not hold the chairmanship, a post currently handled by Richard Kovacevich; the two were asked to explain an unpopular decision to cut the bank's share dividend. Citicorp's annual meeting was also not without angry and outspoken stakeholders.

One likely result of the banks' presumed recovery and the easing of the recession is the disappearance forever of abstruse financial products like securitized mortgages, structured investment vehicles, and credit default swaps. Regulatory agencies probably will apply more rigorous standards, and Congress may take a greater interest in quarterly and annual earnings reports, stock market volatility, executive compensation, and shareholder opinions. The general public, that is, the taxpayers footing the bills, may be appeased but may also expect greater transparency, accountability, and government regulation; additionally, many people may want to see tangible benefits like restructured mortgages, reasonable lending rules and credit card rates, and low inflation. Banks will be around a long time yet, recession or no recession; however, in any event bankers are going to have to work harder to satisfy not only their shareholders and the government watchdogs but also to earn back the confidence of average folks, the ones with savings and investment accounts, mortgages, and credit card debt.

Floyd Norris, "The World's Banks Could Prove Too Big to Fail - or to Rescue", New York Times
Dan FitzPatrick, "Lewis Fights for Control of BofA", Wall Street Journal
Graham Bowley and Eric Dash, "Feeling Secure, Some Banks Want to Be Left Alone", New York Times
Matthew Rafat, "Reviewing Wells Fargo's 2009 Shareholder Meeting: No One Really Knows Anything", Seeking Alpha
"Citigroup Shareholder Meeting a Garish Circus of Despair, Basically", New York Magazine