When the CEO of one of the world's largest money center banks says things in the credit market will be bad for a long time, it is at least worth a listen.
James Dimon, head of JP Morgan (NYSE: JPM) told German publication Welt am Sonntag that he thinks the financial crisis in the U.S. could go on for much longer, according to a report by Reuters. Because Dimon's bank is in fairly good shape and has not had to level of write-offs that many of his peers have suffered, the long cold Winter of finance may not harm his company too badly. That does not go for other banks.
If the stock market is a fairly good proxy for which financial firms are likely to be OK in a prolonged crisis and which are not, then Merrill Lynch (NYSE: MER) and Citigroup (NYSE: C) have to be the top candidates for more trouble. Over the past year, JPM's shares are off about 5%. Citi is down 50% and Merrill is off by over 40%.
If Dimon is right, many big banks and brokerages are in for more write-offs as mortgage defaults move up, LBO debt loses more of its value, and consumer credit card paper gets hit by delinquencies. More write-offs mean raising more capital, something which Merrill and Citi have been doing with regularity.
If the two weak firms need to raise another $10 billion each, it is not hard seeing their shares slide by 15% or more. They almost certainly will survive, but not without shareholders paying a big price.
Douglas A. McIntyre is an editor at 247wallst.com and the author of the Ten Stocks Under $10 letter.
Comfort Zone Investing: One thriving area of real estate: Apartments
Just how high will U.S. gasoline prices rise?
Nordstrom and Kohl's post smaller-than-expected Q1 profit declines
Reader Comments (Page 1 of 1)
5-04-2008 @ 1:50PM
william lindblad said...
Funny, the REAL J.P. Morgan had the same situation in 1909. Mr. Dimon will be proven correct in his forcast but he neglected to mention a wild card - the small institutions.
Considering the existing and potential damage to the economy a great deal of thought should be put into developing a means to thwart any possible future occurences. This will take federal legislation and we can only hope that the august body that sits in Washington will have the intelligence and fortitude for the task.
5-04-2008 @ 2:00PM
william lindblad said...
Doug: Blog proposal. It would be nice if someone would research the current solutions that are in the working and planning stages. Just about everyone knows that there is a problem, but few have much info. on potential solutions. Other than rebate checks and raising limits on Fannie & Freddie the rest seems to be just talk. Whatever comes out of this will be relevant to investors and the market and I am sure that it would be of interest.
5-04-2008 @ 3:44PM
Bill said...
It doesn't take a financial expert to have seen this coming 5 years ago. Unfortunately the greed of Americans, led by our government and corporations like JP Morgan has led to this crisis. You cannot have the housing market gain more in 4 years than it has in the previous 30 years without serious repercussions. Anyone who stood to profit from rising prices knew the end but did nothing to stop it because they were making record profits. In my humble opinion, I hope they all lose tremendously, but if the Feds bail them out, then all should be brought up on charges of TREASON!