On Banks and writedowns

November 19, 2007 By: User Image Arohan Category: Current Events, Investing

As I write this, US markets are still in doldrums, today spooked by Goldman Sachs’ downgrade of Citigroup. Specter of more writedowns at some of the banks are depressing the prices. The entire financial sector seems to be unable to pick itself up let alone carry themselves with any dignity.

Many of these financials are the Giants of the industry, the bedrock upon which the Capitalist system is built. It may be right for the investors to be afraid. But consider this: Goldman Sachs is likely to pay out about $17 Billion in bonuses this year.

(Aside: Quite stark when you look at the Bear Sterns market cap: 13.62 Billion)

Okay, so my point exactly is what?

The point is that even though the sub-prime fiasco is a blip, a significant blip, the future for financials is not as hellish as today’s stock prices show. Does the scale of GS bonus pool not show that atleast Goldman is confident in the long term health of the industry? Good solid banks like Bank of America, while they did have some exposure to subprime markets, will do well over a long term as long as they exhibit solid management and execution. The stock price for these well managed banks are attractive today. While they have been impacted by the current asset writedown, the future of these banks has not clouded.

And the banks re-structure, re-invent, etc. They know money. And the world economy needs them. A recession in US will only slow them down, but with other parts of the globe quickly climbing the value chain, the demand for these bank’s services will only increase. This is not end of the world. Not even for Citigroup. If your investing horizon for good solid companies is, like me, forever, you should look at banks (do your dd before you buy)

Disclosure: Own BAC and WM