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Sept. 29 (Bloomberg) -- U.S. policy makers should back the creation of new banks because the country’s biggest lenders are restrained by faulty mortgage loans and inflated staffs, according to Jeffrey Gundlach, founder and head of asset manager DoubleLine Capital LP.
“They should be encouraging new banks,” he said in an interview today. “There aren’t enough new businesses to compete with entrenched businesses.”
Gundlach, who helped manage the top-rated intermediate-term U.S. bond mutual fund for 15 years, has been negative on U.S. banks since 2007 as mortgage issues weigh on profitability and, more recently, as trading losses mount. The KBW Bank Index, an equity barometer that 24 big U.S. banks, is down 32 percent this year, and the Bank of America Merrill Lynch U.S. Corporates, Bank bond index has lost 2.9 percent.
“There’s really just nothing good happening in the banks,” said Gundlach, whose Los Angeles-based DoubleLine has attracted $17 billion of assets since its December 2009 inception. He’s negative on Bank of America Corp. because of its 2008 takeover of subprime lender Countrywide Financial Corp.
Jerry Dubrowski, a spokesman for the biggest U.S. lender, said “We have strengthened our balance sheet, our capital ratios are three times what is required under regulatory minimums, we have record amts of liquidity, and we’ve built up sizable reserves to handle future mortgage related claims.”
Chief Executive Officer Brian T. Moynihan has agreed to sell almost $50 billion in assets and units amid investor concern that mortgage losses may force him to raise funds to comply with new international capital standards. He has repeatedly said that the Charlotte, North Carolina-based firm will not need to issue new stock. The divestitures raise cash and reduce assets deemed risky by regulators.
“We have important work to do to continue putting Countrywide’s legacy mortgage issues behind us and building the capital we will need to meet new regulatory requirements and the market’s expectations in coming years,” Moynihan said Aug. 19.
Gundlach also is avoiding banks after debt from high-yield bonds to subprime-mortgage securities dropped in June as the Federal Reserve Bank of New York unloaded assets assumed in the rescue of American International Group Inc. and held by a vehicle called Maiden Lane II. The Fed still has about $21 billion to be auctioned, according to Barclays Capital data.
Banks lost money after credit-default swaps indexes used by dealers, hedge funds and other investors to protect against losses on subprime housing debt and commercial mortgages plummeted and rebounded on the Fed actions, according to Gundlach.
Bank profitability is also damped by the dropping yield on 30-year Treasury bonds, which dipped below 3 percent for the first time since 2009, after the Fed completed its $600 billion of bond purchases, as well as the risk of losses in European banks as the region struggles to avoid Greece’s default. Banks should also slim down, as “employment in the financial services industry is incredibly high relative to history,” he said.
Financial firms have announced more than 120,000 cuts this year, while hiring in some markets or businesses, data compiled by Bloomberg Industries show. London-based HSBC, Europe’s largest bank, said last month it will shed 30,000 workers. Bank of America Corp., the biggest U.S. lender by assets, said Sept. 12 it also will eliminate 30,000 jobs in the next few years under a project to remove about $5 billion in annual costs.
Gundlach previously co-managed the TCW Total Return Bond Fund, which returned 7.6 percent annually in the previous 15 years, the most by any intermediate-term bond fund, according to data from Chicago-based Morningstar Inc.
--With assistance from Hugh Son and Caroline Salas Gage in New York. Editors: Mitchell Martin, Pierre Paulden
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