Trouble Ahead for Big Banks? (NYSE:C),(NYSE:BAC),(NYSE:JPM)

Big banks may be the biggest losers for 2010, and we are talking the big names like Citigroup Inc. (NYSE:C), Bank of America Corporation (NYSE:BAC) and JPMorgan Chase & Co. (NYSE:JPM).  Despite recent earnings that imply a more optimistic future, the fundamentals are screaming at many investors.  Add a little Obama to the mix and you may indeed have the recipe for disaster for banks.

Obama is laying down the law for the big banks… no more trading, not for commercial banks. Michael Shulman seems to agree.  He comes to us today with convincing statements as to why shorting the big banks might be the best investment for 2010.

Michael Shulman – This week Obama bared his teeth with Paul Volker providing the tooth whitener - no more trading guys, not if you are a commercial bank. I find this a splendid idea - more on that in a later column - the proposal not just the result of the financial crisis but a direct shot at banks paying obscene bonuses while 20% of Americans are out of work, underworked or out of the work force altogether.

So let me re-state why some banks are the slam-dunk shorts of the year.

• Their own earnings announcements show continuing problems with consumer credit, with Wells it was also commercial mortgages, none are reserving enough against future losses, especially Citigroup and all are talking about problems with consumer loans for the rest of the year. Their words, not mine.
• They are worried about consumers due to 20% unemployment and the possibility - I say it is a 90% probability - see my piece Shorting the Double Dip -- of a double dip recession in the real world.
• Hundreds of billions in off balance sheet assets are going to hit balance sheets in Q1. This is particularly true of Wells and Citi. These assets are of an unknown quality - then again, they are off balance sheet for a reason.
• As interest rates rise, profits from a very steep yield curve will shrink.
• And if the Obama/Volker plan goes into effect, no more profits from proprietary trading.
• Oh, yes, don't forget the $90 billion in bank fees (lost by the banks).

Some geek can do the silly math about how much profit will be reduced at each major bank from this and that - the larger issue is long term, most banks will have their ability to generate profit from each dollar of capital lessened compared to the period of 1999-2009. Through reduced leverage and reduced or eliminated trading desks. Simply put, game over. It will take a lot more capital to generate the profits generated in the past. That means dilution or reduced profits per share and that means lower stock prices.

The biggest losers? The real hybrids - Citi, Bank of America (the proud owner of Merrill Lynch), and JPMorgan. The unscathed or winners? Goldman Sachs and Morgan Stanley, pure investment banks and trading shops.

Read all of Shulman’s story here.