Big U.S. investments banks have gotten a crash course in damage control over the past several months, telling investors and analysts alike to dial down their expectations until the credit crisis runs out of steam.
But what happens when it does recede, and banks need to dial those expectations back up again?
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The decline in mortgage markets has drastically reduced the number of structured investment vehicles and securitized bonds that had been a key source of income before the crisis hit.
Meanwhile, subprime-related losses have wreaked havoc on banks' balance sheets, making it much harder to secure loans by leveraging their assets. And there's a lack of capital to fund M&A deals.
These and other woes won't go away anytime soon, watchers say.
From Reuters:
WASHINGTON (Reuters) - The FBI has more than 200 agents and 33 task forces addressing mortgage fraud, has more than 1,300 cases under investigation and has targeted 19 large companies, FBI Director Robert Mueller said on Friday.
"Clearly, in the last couple of years, we have seen a substantial increase in mortgage fraud cases, and my anticipation is that we will continue to see that increase," he told a question-and-answer session after addressing the National Press Club.
Mueller said there are 19 cases the FBI is investigating of large corporations that may have contributed to the mortgage fraud crisis. He did not identify any of the companies, and the number is the same as the one he gave last month.
FBI officials have said the investigation of the large companies has focused on possible crimes such as accounting fraud, insider trading and deceptive sales practices.
Let's put these two elements together into the following data points:
1.) The financial services industry will have a smaller palate of financial resources going forward. Balance sheets are not conductive to investment or massive restructuring (meaning buying and selling parts of various companies). That means the possibility of seeing big companies buying smaller companies is smaller. It does not mean it won't happen; just on a smaller scale.
2.) This administration has been very lax regarding regulation. My guess is the mortgage fraud investigations will grow for some time -- until the statute of limitations runs out on this stuff.
3.) Congress is already looking at this matter, and will probably start writing large bills re-regulating the financial industry.
The next few years will be very interesting as events unfold. However, I don't think it will be a good time to move into the financials area of the market unless you have the stomach for higher volatility.
