Bank stocks have rallied for weeks on the premise that the first quarter may be the turning point for the industry. Losses from mortgage derivatives may be falling, although that does not necessarily make sense given the state of the housing market. Consumer credit and commercial real estate losses may be only modest. Citigroup (C) has signaled that its results are better than expected in the first two months of the year.
But, the banking bubble is about to burst. Last last week, Jamie Dimon, the CEO of JPMorgan (JPM), said that March was a rough month. Much worse, there are media reports that UBS (UBS) is facing billions of dollars in losses and significant write-offs.
According to Reuters, “Shares in UBS, the world’s largest wealth manager in terms of assets, fell 7 percent on Friday as rumors swirled of a profit warning and more writedowns in the first quarter.”
Although the talk has died down somewhat, a minority of analysts still believes that more large losses at US banks will trigger the need for much larger investment of federal government capital. The nationalization of banks is still not out of the question. That means that banks stocks could still go to zero.
The problems at UBS may be unique to the bank. But, because it is one of the largest financial institutions in the world and its balance sheet is not terribly different from other global banks, that is not likely.
Douglas A. McIntyre