BREAKINGVIEWS-Financials investors brace for the worst

Tue Aug 9, 2011 9:28am BST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Antony Currie

NEW YORK, Aug 9 (Reuters Breakingviews) - Most large U.S. financial institutions look far better prepared for a downturn than before the last crisis. Investors don’t seem to care. The Standard & Poor’s downgrade of Uncle Sam’s AAA credit rating added fuel to fears the country’s anemic economic recovery will stumble back into recession. That helped spur double-digit drops in financials across the board.

Shareholders on Monday erased $100 billion of value from the 20 largest U.S. banks, insurers and fund managers.

The sell-off reeks of panic, potentially exacerbated by long-short hedge funds having to sell positions to meet margin calls. Shareholders might not believe a crash as bad as 2008 is coming. But the rout suggests they’ll ask questions later.

It means ignoring some of the big changes for the better imposed on banks by markets and regulators. Leverage is lower, liquidity is better and capital ratios are not only higher but also consist largely of common stock. Banks are also exiting businesses that aren’t crucial or decent money spinners. And, at least in theory, they have a stronger handle on risk management.

But the market fears are nevertheless understandable. After all, investors heard soothing words from bank executives for much of 2007 and 2008, explaining why they had more than enough cash to survive a credit market freeze, write-downs on mortgages wouldn’t need further adjustments and they didn’t need more capital. That was until they did.

Shareholders don’t want to be caught out again. Considering how a recession would both stymie bank earnings and kick off another bout of mortgage losses, it’s no surprise they’re paying no heed to book valuations. Virtually all the big banks are now trading at a discount to their implied break-up worth -- and most were even before Monday’s mania.

Bank of America (BAC.N), for example, trades at a lowly one-third of assets minus liabilities, Citi’s (C.N) just below half and even JPMorgan (JPM.N) musters only 76 percent of book. Wells Fargo (WFC.N) and U.S. Bancorp (USB.N) are so far the only ones to have kept their heads above water.

It may be that investors will now sit back and reassess. But the recent ructions show methods have changed. Trust is down, verifying is up -– and if there’s hint of a crisis, get out fast.

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CONTEXT NEWS

-- Shares in many financial institutions plummeted by 10 percent or more on Aug. 8, with Bank of America’s 20 percent fall the worst. The 20 largest banks, insurers and asset managers in the United States lost a combined $102 billion in market value.

-- The group includes: ACE, AIG, Bank of America, BB&T, BlackRock, Capital One, Chubb, Citigroup, Franklin Resources, Goldman Sachs, JPMorgan, MetLife, Morgan Stanley, PNC Financial, Prudential Financial, SunTrust, T Rowe Price, Travelers, U.S. Bancorp and Wells Fargo.

-- Reuters story: Wall Street plummets as fear jumps on historic downgrade [ID:nN1E7771WX]

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(The author is a Reuters Breakingviews columnist. The opinions expressed are their own)

-- For previous columns by the author, Reuters customers can click on [CURRIE/]

(Editing by Jeffrey Goldfarb and David Evans)

((antony.currie@thomsonreuters.com)) Keywords: BREAKINGVIEWS FINANCIALS/