Regulatory Clarity Still Lacking For Financials


Bank of America losses extended Monday, sliding more than 4 percent by the middle of the trading session, following a tremendous selloff Friday after disappointing earnings.

So what's wrong with Bank of America? Is it really that different than the other financials?

Investors are seemingly focused on two story lines: capital markets performance, down by a much bigger margin than their competitors that have reported so far, and questions about financial regulation and Bank of America's skeptical view, particularly about the impact on their card business.

Weakness in Financials as a Whole

Amy Butte, former chief strategist and CFO of Credit Suisse First Boston's Financial Services Division and founder of TILE Financial, said weakness at Bank of America is reflective of the financials as a whole. The problem, she said, is the lack of clarity on financial regulation.

"I think there's uncertainty across the entire industry," Butte said. "We're uncertain about the capital markets, we're uncertain about earnings, we're uncertain about valuation, and it's going to take a long time to figure this out.

It's going to take more than six years before regulators write the rules that will clarify the situation, she said.

On top of that, there's investor confusion about Bank of America's stock, Butte said. "Is it a capital markets stock, is it a bank stock?"

Paulson & Co., meanwhile, is sticking with Bank of America in the "Recovery Fund" and Bank of America is believed to be part of that fund, which is down 12 percent for June.

Sources tell Kate Kelly that Paulson still believes in Bank of America, however. But redemptions could be playing a large part in why Paulson and others are hanging on.

"What we know is, roughly $500 million or so in redemptions is what we saw through June 30, however activity in recent weeks probably isn't reflected yet, so if people are looking at the numbers and saying 'I want out' we're not going to know that for a few months yet," Kelly explained.

"All these guys, they're going to have new challenges and they're going to have to innovate," Butte said. Meanwhile, smaller firms will have a lot of opportunity to improve their market share over the next several years.

And what about the China factor? A lot of large banks have been looking throughout Asia and China in particular for growth business. Butte said she believes the US capital market is one of the biggest and "they're still going to have to find a way to do business at home."

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About TILE Financial: Butte's TILE Financial is only available through Citi Private Bank.