This morning I woke up to the soft patter of rain. Now this might not seem odd to some of you, but to me, and the other folks who live here in Central California, it most certainly is odd. It is almost July and it is cloudy and raining. Looking outside, it strikes me that the odd weather is a metaphor for the world – what once was no longer is. Everything seems to be changing …
The Greek Parliament did its thing today, and it seems the market likes the outcome. As I write, the market is up after the news of the Greek report. At the end of this day, the fickle market might well head in the other direction, especially when the market digests the Greek vote, when the market settles on the idea that this vote is but the first of two necessary to keep Greece from default. The second vote comes tomorrow when the Greek Parliament will decide and then vote on how to implement the austerity package …
Earlier this year, I suggested you keep an eye on the financial sector. I suggested that some of the ills affecting the financial industry would begin to abate this year. One of those ills is the presence of lawsuits stemming from the mortgage-backed securities fraud that set back the economy and angered those who purchased them. I suggested these lawsuits would not go to trial, that those on the hook would settle rather than go to court. Well, Bank of America has been doing just that. Yesterday, the banking giant settled with another group.
Bank of America Corp settled nearly all of the claims related to the legacy Countrywide-issued first-lien residential mortgage-backed securitization (RMBS) repurchase exposure for $8.5 billion in cash.
The interesting fact is the $8.5 billion settlement is much less than half of what the group wanted, which was $22 billion. The signal for the market is the amount of money the banks are on the hook for will not be what the banks ultimately pay, and what they pay will not be more than what they can afford. It is likely that Bank of America will write this payout off next quarter, moving it from profit to loss. But here is the important thing for investors and traders. The bank will swallow the loss and move on. The settlement means one more problem is out of the way. This process will flow the same for all the banks in this situation. Looking at the situation in just this light suggests the financial sector is offering some value opportunities.
The other factor beating the sector down is the pending Dodd-Frank regulatory reforms. As I said earlier in the year, as these regulations are implemented, banks will be forced away from trading for profit. In order to keep their stock price up, banks will turn back toward what banks have traditionally done to make money, and that is to make loans. If this happens, and I believe it will, banks will become more stable, and thus more attractive as investment vehicles.
The Greek vote today softened the fear about default for the moment, but the global financial sector still has serious exposure, and that includes some big U.S. banks, as well as other prominent U.S financial institutions. As it is with the lawsuits and the Dodd-Frank reforms, so it will be with Greece – the financial sector is too big to fail, and so it won’t. Sooner rather than later, the sector will stabilize, thus opening the door to making money for them and us.
Trade in the day – Invest in your life …
