Wall Street retreated back into panic mode amid growing worries about the economy, prompting leaders of major U.S. banks to take the rare step of assuring jittery investors that a repeat of the 2008 financial crisis was not about to happen.
The chief executives of the nation’s three biggest banks — JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. — are fighting speculation that they are in trouble and leading the nation back into recession.
Banking stocks have recently slumped to levels not seen since Wall Street’s meltdown three years ago, when the industry received a massive government bailout to avert collapse. They also led the market’s huge dive Wednesday, when the Dow Jones industrial average plunged 520 points.
During the stock market’s rout, a leading index of bank stocks dropped 7.1% — far outpacing the Dow’s 4.6% slide. Over the last month, banks performed worse than any other sector in the broad Standard & Poor’s 500 index, dropping 22%.
“With the stock prices down so much and the memories of 2008 so fresh, there are probably a lot of people who could use some reassurance that we aren’t going to repeat that situation,” said Jim Sinegal, a bank analyst with Morningstar. “With the stock prices down, everyone is trying to address it all at once.”
Banking executives have scrambled in the last 24 hours to broadcast the message that their balance sheets are sound.
JPMorgan Chase CEO Jamie Dimon made a television appearance in California on Wednesday to talk about the health of his bank just hours before BofA CEO Brian Moynihan submitted to a telephone grilling from skeptical investors. And Citigroup’s Vikram Pandit earlier this week sent a voicemail to the bank’s employees asking them to tell customers the company was in good shape.
It is all enough to provide an eerie reminder of 2008, when the collapse of Lehman Bros. helped lead the stock market into a free fall.
Back then, as the markets started to spiral out of control, executives at Bear Stearns and Lehman held their tongues, waiting until the problems had risen to a fever pitch before responding to critics. This time around, Moynihan, Dimon and others are taking a different tack in an effort to calm investors.
The overriding message: This time is different.
“The fundamentals are so much better than four years ago,” when the economy and financial system began to come unglued, Moynihan said in his conference call with investors. " We expect it’s going to be a slow and steady, but grinding, recovery.”
In his appearance from California, Dimon said that “if I thought it was a calamity I would go back to New York. But I think this is just a lot of volatility in the marketplace.”
The appearances temporarily soothed investors, with Bank of America and JPMorgan stocks rising in the hours after the CEOs spoke. But the comfort soon dissipated and the stocks headed down again. JPMorgan shares shed 5.6% to close at $34.32, while BofA dropped 11% to $6.77 and Citigroup tumbled 10.5% to $28.49.
Meredith Whitney, one of the most prominent and pessimistic of bank analysts, said Wednesday that many of the banks are “zombies,” thanks to the combination of a slow economy and recent regulations that force banks to sock away more ultra-safe capital. She is one of a wide array of analysts who have slashed their estimates for how much profit banks will generate in the near future
Investors are concerned about specific issues at each bank, such as the troubled mortgage portfolio that Bank of America inherited when it bought Countrywide Financial Corp. in 2008. But there are broader concerns about the exposure of the banks to the troubled bonds of Spain, Italy and Greece.
Concerns about economic problems spreading throughout Europe punished shares of French financial companies Wednesday, and caused some to worry that it could spread to U.S. banks. Like his American counterparts, Societe Generale CEO Frederic Oudea got on the phone with American reporters to dismiss rumors that his bank was going under.
“Really, it’s very surprising to see rumors like this,” Oudea told CNBC, dismissing trading floor talk that his bank could be pulled down by bad bonds. “All that is absolutely rubbish. It’s ridiculous.”
Analysts have tended to agree that banks are much safer than they were in 2008. This time around, banks have also squirreled away reserves to deal with future losses, which they did not have three years ago.
There is also much less risk being taken by the banks since the financial crisis. Wall Street had multiplied each bet they took with leverage, giving them much farther to fall when the economy went bad. Sinegal estimates that big American banks are about three times less leveraged than they were four years ago.
Pandit referenced the fact that his bank has changed radically since the financial crisis, telling employees in his voicemail that “not only is it a fundamentally different time, but we are a fundamentally different company.”
But that didn’t help the company’s stock.
“It can be a no-win situation,” said Sinegal. “If you see a CEO go out there to defend a bank, you wonder what he has to defend. It’s like a vicious cycle.”