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2. Debate about "unfair" treatment of JPMorgan percolates

Few people are cheering the government shutdown. Many more are decrying the political gridlock that has led to this awful moment. The angst is palpable. But in the interest of finding some sort of silver lining to alleviate the gloom, we can thank Bloomberg, which offers a nice article suggesting strongly that previous government shutdowns proved to be buying opportunities.

Historically, "the Standard & Poor's 500 Index has risen 11 percent on average in the 12 months following a government shutdown (since 1976). That compares with an average return of 9 percent over 12 months. In all the cases, the U.S. equity benchmark was higher by the end of the next two years."

A few brokerage houses have weighed in with similar sentiment. Many remain bullish on the market through the end of the year based mainly on expected earnings strength.

Even speculation about a shutdown can tank markets short-term, providing a nice entry point. "The last time there was speculation about a U.S. government shutdown was in August 2011, when the S&P 500 fell more than 11 percent in three days. Stocks tumbled during the stalemate between President Barack Obama and Congress over whether to raise the debt ceiling and S&P stripped the U.S. of its AAA credit rating that month.

The losses were later reversed, as the Federal Reserve pledged to hold the benchmark interest rate near zero and maintain bond purchases to support the economy. The S&P 500 gained 25 percent in the 12 months through August 2012."

As for the last actual shutdown, we have to time travel back to December 1995, when "the S&P 500 rallied 21 percent in the following year, according to data compiled by Bloomberg. The U.S. equity benchmark was up 36 percent in the 12 months after a one-day closure in 1982. That was the biggest advance of the 12 instances."

For more:
- here's the article

Read more about: Government Shutdown
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By Jim Kim

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3. CEOs discuss fiscal issues in Washington

Is JPMorgan Chase being unfairly targeted by regulators?

The main argument is that so much of the current enforcement fervor that has descended on the bank stems from activity perpetrated by Washington Mutual and Bear Stearns. The argument goes like this: the bank did the government a favor by buying out these companies at the height of the financial crisis. For prosecutors to turn around and target the bank for the sins of these purchased institutions seems ungrateful and unfair.

To be sure, there are some actions for which it would be hard to make this case. The London Whale trading fiasco is a prime example of an enforcement action that the bank richly deserved. The dubious activity in the energy markets similarly cannot not be blamed on either WaMu or Bear Stearns.

But what about all JPMorgan's mortgage woes?

It's a question that keeps cropping up. DealBook weighs in with an interesting look. "At the time, JPMorgan was keen to use its relative strength to pick up financial firms at steep discounts. The bank was interested in acquiring Washington Mutual months before it collapsed, but was rebuffed. JPMorgan had also considered Bear Stearns before it bought it. What stood out was Bear Stearns's prime brokerage unit, a business that provides services and loans to hedge funds."

Recall also that JPMorgan performed due diligence on their purchases. "When buying Bear Stearns and Washington Mutual, it marked down their assets by a large amount, in part to reflect the mortgage risks. In its haste to make the acquisitions, JPMorgan may simply have miscalculated and underestimated the problems."

While the debate is interesting, it's a moot issue. JPMorgan will have to settle all this, just as Bank of America had to settle all the Countrywide-related claims.

For more:
- here's the article

Read more about: JPMorgan, Enforcement Action
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By Jim Kim

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4. How big will the earnings drop off be?

And so we stand at the precipice.

For the first time in 17 years, the federal government is being shut down, with all sorts of economic implications. This is not good news, and we're confident the gravitas of the situation is not lost on any of the key players.

We can only hope that the CEOs of top banks, including Lloyd Blankfein of Goldman Sachs, Brian Moynihan of Bank of America, and Jamie Dimon of JPMorgan Chase, can work some magic in Washington.

The august group was scheduled to meet with President Obama among others, and their message will be simple: this is one crazy way of running the country.

There could be some silver linings to be seized on as the government shuts down. As painful as it will be will be, it's nothing compared to the pain if the U.S. were to default on its debts. That would be an unmitigated economic calamity.

So it's possible that to end the government shutdown, some sort of agreement could be hashed out to deal also with the debt ceiling. It would be asinine to solve the shutdown dilemma in a way that merely postpones the key issues a mere two weeks.

Hopefully, the CEOs will wield their considerable heft on both sides of the aisle, even brokering a deal if they have to.

For more:
- here's an overview from Politico

Read more about: Government Shutdown
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By Jim Kim

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5. Wells Fargo in the latest GSE settlement

We noted recently that earnings estimates for banks are dropping quickly.

The third quarter is shaping up as a real gut-wrencher, especially for the top investment banks. FICC-oriented trading has been fingered as the main culprit.

To quantify just a bit, "More than $1bn has been wiped off earnings estimates for Wall Street's five biggest banks in the past month," according to the Financial Times, citing Bloomberg data that shows estimate reductions of $210 million for Citigroup, $128 million for Bank of America, $123 million for Goldman Sachs and $97 million Morgan Stanley. JPMorgan has been doubly hit, as legal costs are expected to soar. Its estimates have been reduced by $526 million.

The first two months of the quarter were obviously weak. While there was hope that September would bring a change of direction, those hopes have been dashed. The Federal Reserve Board's move to postpone tapering was a body blow, sealing banks fate for the current quarter.

The big issue is where banks will realize some offsetting income gains. M&A revenue is not expected to be strong, unaffected by the recent huge deal announcements. Mortgage activity has also slowed. Some banks will benefit from reversals of previous credit loss set-asides.

But all in all, the tone remains downbeat.

For more:
- here's the article

Read more about: bank earnings
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By Jim Kim

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