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Banks’ highly leveraged business models make them particularly vulnerable to any crisis of confidence – hence their predilection for cathedral-like headquarters.
Hence, too, the special hatred reserved for “rumour-mongers”. Jamie Dimon, chief executive of JPMorgan, is the latest to weigh in on this subject. But his use of the vague phrase “where there is smoke, there is fire” in relation to the role false rumours may or may not have played in bringing down Bear Stearns is telling. Undoubtedly, malicious gossip can move markets but proving it is a wholly different matter. Mr Dimon concedes he has no evidence of it.
Rumours are, by and large, legitimate sources of information used in setting asset prices. Wall Street is curiously reticent on the role merger rumours played in boosting stock prices in recent years. The banks are vulnerable to tittle-tattle precisely because of the bad decisions they took during that period.
The market remains bearish on US financial stocks, with short interest representing 6.2 per cent of the sector’s float compared with 3.6 per cent for the S&P 500 overall, according to JPMorgan. Deleveraging has barely begun. Loans and investments in the US banking system are contracting at the fastest rate since the Federal Reserve began reporting weekly data in 1973. Importantly, this tightening really kicked in after the Bear bail-out, indicating that the Federal Reserve’s extraordinary measures did not restore enough confidence. In that context, the Fed’s possible extension of “temporary” lending facilities beyond year-end smacks of necessity rather than cause for celebration.
Meanwhile, for all Treasury secretary Hank Paulson’s hopeful talk of curing the housing market hangover, the inventory of completed homes remains at more than 10 months’ worth of sales. Short-sellers have good reasons to remain negative on banking stocks, without resorting to fabrication.
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