Wells Fargo & Co (WFC), JPMorgan Chase & Co. (JPM): How Banks Can Roll the Dice and Lose It All

The lesson is that capital levels in a vacuum are not enough. Credit quality, off-balance-sheet risk, and risk management should all be considered relative to capital. This is as true today as it was in 2007.

Through this lens, it’s clear that while Countrywide and Wells Fargo & Co (NYSE:WFC) had seemingly comparable capital levels in 2007, the tsunami of credit problems at Countrywide was more than enough to flood capital and sink the company. Because of its more conservative underwriting, Wells Fargo & Co (NYSE:WFC) was orders of magnitude more capitalized than Countrywide, despite the mere 40-basis-point difference on paper.

“Built to Last” versus “Built for Big Quarters”
Baseball, much like investing, is a game steeped in averages and data. Some teams play for the “big inning.” They swing for the fences, hoping to hit home runs and put up a large number of runs in a short amount of time.

Other teams play “small ball.” They focus on getting on base, playing as a team to chip away at the defense, scoring runs slowly and consistently every inning. JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC) never took a quarterly loss throughout the crisis, scraping for earnings as they protected the balance sheets and fought hard to further the brands.

When times are good, hitting home runs makes you look like your the best team in the big leagues, as Angelo Mozilo and Countrywide looked in 2005.

But when times get tough, it’s risk management, culture, and fundamentals that allow companies such as JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo to continue to produce profits every single quarter without fail.

Banks need to play small ball. They need to make good loans, add value to customer’s businesses and finances, and put up consistent, low-risk returns from quarter to quarter. Countrywide, American International Group Inc (NYSE:AIG), Bear Stearns, and the rest proved that in finance, you aren’t guaranteed to even finish the game if you’re playing big-inning baseball.

The article How Banks Can Roll the Dice and Lose It All originally appeared on Fool.com and is written by Jay Jenkins.

To follow the Fool’s coverage of financial stocks, click here! Fool contributor Jay Jenkins has no position in any stocks mentioned. The Motley Fool recommends AIG, Bank of America, and Wells Fargo; owns shares of AIG, Bank of America, JPMorgan Chase, and Wells Fargo; and has options on AIG.

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