Krawcheck Warns Investors in Big Banks to Be Wary

Sallie Krawcheck, who used to run wealth management operations for Bank of America-Merrill Lynch (BAC) and Citigroup Smith Barney (C), says bank earnings are being hit — and hit hard — by government fines.

With the announcement that JPMorgan (JPM) had reached a $13 billion settlement over mortgage-backed securities early on Tuesday, Krawcheck was asked by Bloomberg TV when regulators might feel that “enough is enough.”

“Probably not yet, is the answer,” she said.

In her mind, the more important issue is what other banks will pay going forward for similar settlements, if regulators have “started to look at this as a source of revenue, a source of fines.”

It’s essentially become “a tax on excess earnings,” Krawcheck explained. “It really does raise the question of the [bank’s] underlying earnings power.”

For investors, she advises them to “think pretty hard about what these returns are” and what the major bank’s return on equity is. “You have some CEOs talking about 18, 19 and 20 % ROEs. That is a hard thing to think about … particularly coming out of this year.”

How can banks improve earnings in the face of such fines?

“One [way] is to innovate and grow…, which Wall Street has not been great at. What they called innovation was, let’s face it, increased risk wrapped in complexity,” Krawcheck said. “It’s not a great history of innovating in a way that helps consumers.”

Alternatively, the banks can cut costs, or “ride a good market,” she notes.

Dimon in the Rough