Impacts of the Fed's "Big Is Bad" Mentality on BAC
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Bank of America (NYSE: BAC) appears to be able to keep its head above water in these financially stressful times.
Recent reports show that Bank of America shares have outperformed the broader market so far this year. The general belief was that Bank of America would not survive under pressure “even though the company did not include any plans for increases to its dividend or for share buybacks in its capital plan”. Even when the company reported a sharp fall in first quarter profits, it still outperformed the expectations of analysts.
Despite this positive news, the most recent results show that the stock has indeed fallen. However in comparison to its competitors, Bank of America still seems to be on top of the game.
Recently Bank of America was listed, alongside JPMorgan Chase and Goldman Sachs, as one of the major banks resisting the credit limits imposed by the Federal Reserve on the basis that it would have “a negative impact on banks, their customers and the U.S. economy”. The banks involved have also accused the Federal Reserve of trying to minimize the main players in the financial game because it feels that “big is bad”, a sentiment which Bank of America and other major banks claim is not true. The banks say that this will have a detrimental effect on the economical soundness of the banking system as it is stands currently.
The new laws imposed by the Federal Reserve will, if not successfully contended, likely have an effect on the functionality of Bank of America as well as many other similar institutes. For this reason, Bank of America is one of the most unstable stock options available, and this makes the future of the company less than easy to predict. The stock is basically volatile, rising and falling at a moment’s notice, whether by the sweep of the government action or legal action.
Even taking the sharp rises and falls into account, it seems to me that overall Bank of America is improving. Many stockholders are still reeling from last year’s scare when a general consensus thought the bank may effectively go bankrupt, but fortunately it was able to recover. However, this does make you wonder whether or not the bank will be able to recover so completely the next time it runs into trouble of this magnitude.
Bank of America competitor, Citigroup (NYSE: C) is not having much luck in terms of its public image at present. Recently, shareholders voted against the payouts received by Citigroup management, and now the company needs to decide whether or not to ignore this vote. In my opinion, it will ultimately not ignore it. Citigroup really has to do something because the likely consequences of doing nothing seem to be monumental at this point. The company simply cannot afford to let things stand. The only question left is what, exactly, Citigroup will do about the problem and whether or not it will be enough to restore the faith of stockholders.
This has sparked something of a trend among shareholders. Other financial institutes that are suffering due to shareholder outrage at excessively high CEO paychecks include Credit Suisse Group (NYSE: CS) and Barclays (NYSE: BCS). Shareholders of both companies recently elected to object to the high salaries being paid out to management figures. This type of outrage is very rare indeed, but it seems that a trend has begun. Investors are not feeling very secure financially in the current economic climate, so when a bank hands out something like $15 million to its CEO, outrage ensues. None of the banks that are facing stockholder uproar have performed well enough for their CEOs to be worthy of such pay.
Bank of America has, thus far, escaped just discontent. Though its hands our tied in large government oversight brought on by the bank bailouts. Bank of America’s actions simply won’t go unnoticed anymore, and it better maintain as clean an image as it can.
Other banks suffering under the current economic climate include HSBC (NYSE: HBC). This bank has recently elected to cut 2200 jobs, targeting mainly management in an attempt to "boost profitability" and reduce "unnecessary bureaucracy". This is in response to the huge changes that we can see in the banking community. The staff cuts should not affect customers unduly, but the image that this portrays may in the long run have a negative effect on HSBC stock. The signal of job cuts to investors is one of financial instability, but it will be interesting to see what HSBC can do with the new money opening up.
Not all banks are, at present, making bad names for themselves as we can see by the fact that JPMorgan Chase was recently named Corporate Donor of the Year by the Food Bank of Delaware. The company has long since been a supporter of the food bank in the area and the good press will help it keep its name in good esteem.
The fact remains that Bank of America, like its competitors remain volatile. They are not the safe-bet stock that you may find in another industry. The stocks can certainly make great leaps on the back of good investments or earnings report. However, legal troubles and government interference are always lingering the background.
If you can’t stomach some pitfalls, Bank of America isn’t for you. Though, that probably goes for the banking industry at large. You’ll want to keep an eye on the current battle that the banks have taken on against the Federal Reserve. The “big is bad” mentality certainly hurts Bank of America, so if the Fed gets its way, it could mean bad news. How bad it will be we won’t know yet. If the banks can keep things as status quo, look for Bank of America to go up. Until, of course, the next road block comes along.
QueenBC has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
