SOURCE: Rothman Research

Rothman Research

May 04, 2010 09:19 ET

A Déjà Vu Feeling Seizes Bank Stocks

JOHANNESBURG, SOUTH AFRICA--(Marketwire - May 4, 2010) - -- A couple of years back, Wall Street watched in awe while the banking system in the U.S. slowly imploded forever altering the financial landscape of the country, and sending shockwaves worldwide which triggered a global recession. Irresponsible and unsound lending from banks, the subprime mortgage crisis, hyped oil prices and food and many other factors had contributed to the creation of a caldera effect that led to the collapse of the U.S. financial system. The immediate and controversial response from the government was massive monetary injections to save big banks from a domino effect.

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When the Obama administration came in power, one of the main priorities was to create "a sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression." This was met with passionate debates and virulent oppositions from the Republicans until a few weeks back a déjà vu feeling swept through Wall Street; one of the dominating investing banking and securities firm, Goldman Sachs, was under federal scrutiny. With mid-term elections too close to discard popular feelings regarding banks, the Republicans agreed to start working towards a financial overhaul. However, last Friday big banks' stocks together with the overall market got pulled in the red as the potential financial reforms started sinking in following news that a criminal inquiry against Goldman Sachs was opened. Regional banks, like Keycorp (NYSE: KEY), had quite an opposite reaction as they traded higher with hopes that the reforms could bring more competitive advantage as it is mainly the big banks that are targeted. 

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The first quarter 2010 earnings have been flamboyant for the U.S. banking system sparking hope that the financial system was on a firm recovery track, and helping investors to start viewing banking stocks with a little less apprehension. It would seem that the Goldman Sachs inquiry has added a new twist to the banking saga in the U.S.

It would be interesting to see how the Canadian banks, such as Royal Bank of Canada (NYSE: RY), would be delivering in their upcoming quarterly earnings. Royal Bank is set to announce its earnings results on May 27th.

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