Impact of financial reform still unclear

Until all the implications of the new law are fully understood, bank stocks will be sluggish -- but worth holding on to.

By Jim Cramer Jul 19, 2010 8:57AM

jim cramerBy Jim Cramer, TheStreet

 

Should there have been more of a bounce after the financial regulatory reform legislation went through? Why was everything so muted? One answer could be that people didn't care for Bank of America's (BAC) earnings.

 

I get that. There was no growth, and management really hammered shareholders with the most bearish possible assessment of the costs of regulation. They basically presented the negatives of all the costs and lost revenue without any potential growth that could come from higher service fees that we all know are on the way. It was a horribly downbeat conference call.

 

But there was something else at work, too, and it must be pointed out. Financial regulatory reform may be done, but it is rapidly dawning on people that we know nothing about what it will mean when it is implemented.


The impact? Totally unclear. The worries about what it means? Totally founded.

Throughout this reform period, we have heard about hedge funds in banks and swaps to be listed on boards. It would be fine if that's all there was. But there are some 2,000 pages to the darned thing, and you know that those two issues can't account for all 2,000.

 

In other words, if you were running a bank, you might say to your lieutenants, "We don't really know what's in here, and until we do, just do less." I think that's the biggest negative. I would be worried about my job if I gave the wrong person a loan, so maybe I just don't give out many loans. Isn't that what is happening now? I think it can only accelerate going forward.

 

Our government is now embarking on the greatest transfer of wealth since the Great Society, maybe bigger. But Lyndon Johnson was a strong believer in growth. That's obviously not President Barack Obama's priority, or he would not have put the cart of regulation ahead of the horse of job growth.

 

In other words, financial reform's relief rally couldn't be bigger because we don't know how deeply to cut numbers based on it. We know only that numbers have to be cut.

 

Until that process is complete and we get some clarity about what just became law, the finance stocks are going to be sluggish, because they have to be. The burden is that heavy, and the growth is that invisible.

 

So why not sell them? What are you going to do, sell Bank of America when its book value is $12 and change and it sells at five times earnings, with credit losses coming down and wild-high cost estimates for financial reform that just got built in? Does that make sense to you? If so, then sell.

 

Plus, I think that when you see reform completed and you know that revenue growth isn't in the cards, the thing you do is merge to cut costs. I think we are going to see a very big merger wave as we figure out the costs of the bill and realize that they will so hamper growth that the way to get earnings will be from streamlining operations through mergers.

 

Worth holding on for, in my opinion.

 

At the time of publication, Cramer was long Bank of America.

 

Jim Cramer is co-founder and chairman of TheStreet. He contributes daily market commentary for TheStreet's sites and serves as an adviser to the company's CEO.

 

Related Articles

7Comments
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

118
118 rated 1
270
270 rated 2
472
472 rated 3
714
714 rated 4
624
624 rated 5
608
608 rated 6
623
623 rated 7
445
445 rated 8
319
319 rated 9
125
125 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
AAPLAPPLE Inc10
ATVIACTIVISION BLIZZARD Inc10
BIDUBAIDU Inc10
BMYBRISTOL-MYERS SQUIBB CO.10
CELGCELGENE CORP10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.