Big Banks: Another Reason to Avoid Them in 2012

As if the big U.S. banks didn’t have enough trouble.

Besides the large U.S. banks’ exposure to Europe and to the derivatives on their balance sheet (off-balance sheet items, which is why no one can evaluate what they’re really worth), there is another issue—a lawsuit—that could cost the big banks billions of dollars and negatively impact their corporate earnings in a significant way.

There is a private antitrust lawsuit that has a staggering five million retailers against Visa Inc. (NYSE/V), MasterCard Incorporated (NYSE/MA), and 13 of the big banks, including Citigroup, Inc. (NYSE/C) and JPMorgan Chase & Co. (NYSE/JPM)—15 major financial institutions in total that could see corporate earnings plummet if this antitrust suit gains traction.

The plaintiffs—the retailers—are accusing the 13 big banks and the credit card companies of colluding to charge fees for credit card transactions that are much higher than a competitive market would command.


Not only are the retailers demanding compensation for overpaying for these fees—dating back to 2004—but they are also probably seeking a permanent fee reduction going forward. The defendants argue that MasterCard and Visa are public firms, which immediately implies they compete with each other for business, outside of the oversight of the big banks. There go the corporate earnings of MasterCard and Visa (if this suit progresses).

The plaintiffs believe they have a very strong case to show that this is one club—the credit card companies and the big banks are intertwined into one. As such, there really is no competition, forcing retailers to pay whatever the fees demanded are.

It is estimated that, in 2009, industry-wide, the fees amounted to some $40.0 billion (source: JPMorgan). Taken over a period of eight years, one can immediately see that the fees amounted to a few hundred billion, which means that even a small settlement with this lawsuit can potentially translate into billions of dollars of losses for each of the big banks’ corporate earnings.

Some banks, in their regulatory filings, have acknowledged the lawsuit and cited some possible implications for their corporate earnings, with Citigroup having gone a step further, detailing its portion of the possible costs of the lawsuit to its corporate earnings at $254 million.

A ruling, expected very early in 2012, will determine if the case can move forward as a class-action lawsuit. Although it is impossible to determine how this case will turn out, it presents yet another risk to owning big banks—impacting their corporate earnings in a major way. Despite the fact that many of the big banks are already down in price, this lawsuit provides yet another reason why the big banks should be avoided in 2012.

Those big bank stocks…no matter how cheap they’ve become…I’m still negative on them.

Where the Market Stands; Where it’s Headed:

It’s actually amazing. Yesterday, the Dow Jones Industrial Average sneaked in another small gain. All these small, ride “the wall of worry” gains have put the market up two percent for the year.

As I have been saying for months, we are in a bear market rally in stocks that started in March of 2009. I’m waiting for the final blow-off on the upside before this bear market rally throws in the towel.

What He Said:

“When I look around today, I see falling stock prices…I see falling house prices…and prices for retail goods stores declining. The media has it all wrong blaming (worrying about) inflation. In my opinion, the single biggest threat to the U.S. economy and to the Fed in 2008 is deflation. You can bet the Fed will expand the money supply and drop interest rates aggressively as deflation starts to rear its ugly head.” Michael Lombardi in PROFIT CONFIDENTIAL, December 17, 2007. Michael was one of the first to warn of deflation. By late 2008, world economies were embedded in their worst state of deflation since the Great Depression.