Financial System Has Hidden Strength
On the day when the nation’s biggest bank suspends cash dividend payments to shareholders--for the first time since 1813--it should be easy to paint a picture of America’s troubled financial system.
A black hole . . . a pathetic tale of bad loans and outrageously inept managers . . . a monumental disaster that threatens to bring down the entire economy, not to mention the stock market.
That would be an easy picture to paint, all right. Except that on this same day that giant Citicorp finally owns up to its loan ills, the Federal Home Loan Mortgage Corp. reports having successfully financed enough home mortgages in the third quarter to boost earnings 21%. The company’s stock jumped $3 to $101.
Meanwhile, discount brokerage Charles Schwab & Co. also is on a roll. Its shares soared $2.625 to $34 on Tuesday--an all-time high--as investors bet that the continuing bull market will mean an unprecedented profit boom for brokers.
Does this look like a financial system in jeopardy? Somehow, even while Citicorp and thousands of other banks and S&Ls; are receding in activity and in importance to the economy, loans and investments still are being made, and money in general still is changing hands.
In fact, optimism about the nation’s financial services industry has been strong enough this year to boost the Standard & Poor’s Corp. index of 40 major financial stocks 35.9% to date, making it one of the best-performing stock indexes, after a 25% plunge last year.
What has happened, slowly but surely, is that astute investors have stopped looking at the financial system as a disaster waiting to happen. Instead, many investors now correctly see a system in transition-- and with that transition there will be many winners to replace the losers.
This change of view has partly been nurtured by the sharp drop in interest rates engineered by the Federal Reserve, which is trying to make darn sure that recession doesn’t turn into depression. But there’s something even more basic going on here: It’s a big country, and no matter what the economic backdrop, someone’s going to have to finance it, invest for it and insure it.
Thus, even as such old-line money-changers as American Express, brokerage Salomon Inc., Citicorp and insurer USF&G; Corp. stumble under the weight of bad investments and/or general mismanagement, there is an army of competitors out there just waiting to grab market share from the tottering titans.
That’s what investors are saying as they bid up such stocks as Charles Schwab, Pasadena-based mortgage banking star Countrywide Credit, and First Financial Management, an Atlanta firm that has built a huge business processing banks’ ever-increasing load of credit card transactions.
As we keep telling the Russians, “it’s wonderful how the capitalist system rejuvenates and refreshes itself,” marvels Bill Corneliuson, a veteran money manager with the Strong Funds in Milwaukee. “If you screw up, like a Salomon, there’s always someone else there to take your place.”
A year ago, many investors didn’t see it that way. In the depths of the bear market, it was easy to assume that there could be few or no winners if the financial system was entering a prolonged period of dislocation and purging from the excesses of the 1980s. Hence, financial stocks were murdered across the board last year.
It’s still true that the financial system is weak. Ed Hyman, a highly respected Wall Street economist at ISI Group Inc., recently itemized for clients some of the troubling facts still staring us in the face as a nation. Among them:
* Total debt as a percentage of gross national product is the highest since the Depression.
* Business failures as a percentage of gross national product are the highest on record.
* Bank and S&L; financial-asset growth is the lowest on record.
* The country’s money supply, the “grease” that keeps the economic gears turning, is growing at the slowest rate in 30 years.
Certainly, the fallout from these trends and from the disastrous real estate oversupply will mean many more bank, S&L; and insurance company failures before the system is again on sound footing.
What’s more, the financial deregulation of the 1980s created investment and lending instruments that essentially allow money to move faster all the time--and that means the opportunities for crises within the system are likely to be that much more frequent, not just now, but throughout the 1990s.
But if investors are relearning anything this year, it’s that crises breed opportunity. If Citicorp has made so many bad loans that it doesn’t have the capital to make good ones anymore, someone else will step in.
Phil Dubuque, one of the hottest money managers in the country, runs the Financial Programs Financial Services mutual fund in Denver. He has steered the fund to a 66% gain this year by investing heavily in such companies as Countrywide Credit, Federal Home Loan Mortgage, First Financial Management and insurer Broad Inc. He looks for the strongest players in growing segments of the financial services industry.
A transition from old to new, Dubuque says, “is exactly what’s happening out there. And my underlying theme is capital: Those financial firms that have the capital will be able to compete, and they’ll be able to buy their competitors.”
“Those banks that fell--they’re never going to be able to rise to the top again,” Dubuque says. But that just leaves that much more market share for the stronger upstarts to grab.
Yes, debt levels are high, bankruptcies are soaring and people are reluctant to spend money. But more than 90% of the work force still is employed. Now or later, they’ll need loans or financial advice. Investors may just be starting to understand what kind of profits the remaining companies that serve that market may reap in the 1990s.
Related Story: A1
Financial Services: Winners and Losers The nation’s financial system is being reborn in the wake of the debt excesses of the 1980s. As some older players fall by the wayside, healthy upstarts are stepping in to grab market share--and that’s producing big winners in the stock market.
Old and Hurting
1991 Tues. close Pct. change Stock high/low and change Travelers Corp. 25 3/8-16 3/8 19 1/8, + 5/8 +15% Salomon 37-20 3/4 25 1/8, + 5/8 +3% American Express 30 3/8-19 21 1/4, + 1/2 +3% USF&G; 12 1/2-6 1/8 7 5/8, + 1/4 +2% Citicorp 17 1/2-11 7/8 12 3/4, - 7/8 +1%
Young and Growing
1991 Tues. close Pct. change Stock high/low and change year-to-date Green Tree 46 3/4-9 5/8 46 1/2, +1 5/8 +328% Countrywide Credit 35-8 3/4 34 1/2, + 7/8 +273% Charles Schwab 34-11 3/8 34, +2 5/8 +199% Fed. Home Loan Mtg. 106 3/4-44 1/4 101, +3 +107% First Finl. Mangmnt. 46 3/8-20 1/4 46 1/4, +1 1/2 +91%
All stocks trade on NYSE.
