'Too big to fail' seen protecting Bank of America, JPMorgan

Posted Sep 22nd 2008 10:00AM by Joseph Lazzaro
Filed under: Forecasts, Competitive Strategy, JPMorgan Chase (JPM), Bank of America (BAC)

If you think that the 'too big to fail' / 'too interconnected to fail' doctrine probably protects the Bank of America and JP Morgan Chase, you think right. But don't expect either stock to race-up like Microsoft (NASDAQ: MSFT) did in the 'Wonderful 1990s' -- not just yet.

The U.S. Government's estimated $700 billion plan to stabilize credit markets will likely safeguard both BAC and JPM due to the large impact a failure of each would have on the financial system, Luigi Zingales, professor of finance at the University of Chicago, told Bloomberg News Monday, adding that it "will definitely make their bonds safer."

BAC, JPM: Operational challenges ahead

However, economist Richard Felson told BloggingStocks Monday investors should not rush out and buy either stock just yet. Felson added that he does not have a rating on nor own shares in either company. The Bank of America (NYSE: BAC), which closed Friday at $37.48, has a p/e of 21; JP Morgan Chase (NYSE: JPM), at $47.05, a p/e of 15.5.

"Each has a series of operational issues to address in the financial services space," Felson said. "The Bank of America has a major merger and culture integration process ahead following the purchase of Merrill Lynch. Major employee, client retention and investment decisions are ahead, and this will weigh on shares."

"JP Morgan Chase is also in the midst of repositioning its brand and resources as the classic investment banking model fades," Felson said. "The company also has to implement a decidedly more-cautious, risk-taking business model, and that's likely to produce more modest profits and pay for employees. As a result, you could see key employees leaving for greener pastures."

So while each company "is likely to benefit from government protections against a failure, that doesn't necessarily mean robust growth is ahead for either company," Felson said.

Market Analysis: Felson added that another factor is likely to affect shares of both the Bank of America and JP Morgan -- the size and scope of the private mortgage market. Considerable Federal Housing Authority involvement in refinancing at-risk mortgages could substantially reduce the pool of potential mortgage customers for each bank, further weighing on revenue.

Tags: bac, banking sector, Federal Housing Authority, FHA, financial crisis, foreclosures, gdp, housing sector, inthenews, jpm, mortgages, retail banking, too big too fail, U.S. economy, U.S. Treasury