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Banks are Playing a ‘Very Risky Gamble’: Strategists

Banks are getting ready to release foreclosed properties onto the markets, which will naturally have an impact on housing and banks. So are banks taking on too much risk? Fred Cannon, co-director of Research at KBW and Charles Ortel, managing director at Newport Value Partners shared their insights.

“The risk is there and it’s been there and the challenge is how much it’s going to play out over the next six months,” Cannon told CNBC.

“As we get into the fall, these foreclosures coming on are going to put pressure on prices, the value of the foreclosed properties and on the asset value of banks.”

Ortel had even stronger words: He said banks are playing a “very risky gamble” and expects more grim data throughout the rest of the year.

“The fundamental underpinning for values of these homes is incomes and we focus on private-sector aggregate incomes. Sadly, when we look back at recent months and years, those incomes are falling and we expect to see more dismal information coming out through the balance of this year,” he said.

One or more big financial institutions could find themselves in trouble again—even perhaps the entities that "already have been rescued,” Ortel added.

GE Capital*. It has not had the same level of regulation as some of its peers. It lost money—$2 billion pre-tax in the 9 months from September 30-June 30."

"It has a mountain of debt and the market thinks that the industrial operations that are strong are behind them—those cash flows are not strong at all,” Ortel said.

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Disclosure:

Ortel does not own shares of Citigroup, Bank of America, General Electric or JPMorgan Chase.

Cannon has investment banking clients who own shares of JPMorgan Chase, Bank of America and KeyCorp.

* General Electric is the parent company of CNBC and CNBC.com.

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CNBC Slideshows:

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Other 'Risky' Banks:

JPMorgan

Bank of America

KeyCorp

Citigroup

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Disclaimer