The Bankers' Dilemma
Dec 19, 2008 (Zacks Investment Research via COMTEX News Network) -- The following post discusses KeyCorp (KEY), Fifth Third Bank (FITB) and Comerica (CMA).One of the foundations of game theory is what is known as the 'prisoner's dilemma.' The scenario is as follows: 2 people are arrested for a crime. If both keep their mouths shut, they will both go free, but if one talks, he will go to jail for 5 years, and his partner will go to jail for life. If both talk, they both go to jail for life. The usual result is that both end up spending the rest of their days behind bars. And the greater then number of prisoners, the higher the probability that one of them sings.So what does this have to do with bankers (other than lots of people would like to see them end up as prisoners)? As the economy weakens due to lack of credit availability, people are becoming less creditworthy.For example, if individuals cannot get car loans, then a car dealer becomes less creditworthy. If all banks were lending, then the creditworthiness of the average borrower would be much higher. However, with credit quality deteriorating, it makes sense for an individual bank to hoard whatever cash it has, and not lend it out. This is particularly true if that bank thinks that all the other banks are going to be hoarding, not lending.Right now banks have lots of cash, the Fed and the Treasury has made sure of that with the alphabet soup of lending facilities for banks and the TARP. However, banks are just sitting on that cash, either letting it sit in the vault, or the economic equivalent in short term T-bills that yield close to 0.00%.As the economy falls off the cliff, formerly very creditworthy customers are becoming much more risky prospects. When housing prices are falling, mortgages are a far more risky proposition to a bank than when housing prices are rising. If all the banks would start lending, the economy would start to revive. From the perspective of any individual bank, the rational course is to not lend.Continue to underweight the banks, in particular some of the firms with big concentrations in areas of the country with lots of cyclical industries, for example KeyCorp (KEY), Fifth Third (FITB) and Comerica (CMA).Read the full analyst report on KEYRead the full analyst report on FITBRead the full analyst report on CMA
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Dirk van Dijk, CFA
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