Is the Big Bank Rebound for Real?

As the Dow (NYSE:DIA) closed 183 points higher on Thursday, shares of major banks (NYSE:XLF) climbed higher.  Big banks such as Goldman Sachs (NYSE:GS) and J.P. Morgan (NYSE:JPM) jumped 3.86% and 5%, respectively.  Bank of America (NYSE:BAC), which has been knocked down heavily due to capital concerns and $5 debit fees, rallied nearly 9% higher.  After announcing new fees of their own, Citigroup (NYSE:C) also rallied 5% higher.  There were a couple of key headlines that lead to the rally in US banks.

German Chancellor Angela Merkel, reiterated that governments should consider boosting European bank’s financial cushions as the debt crisis continues to remain unresolved.  The ECB decided to leave rates unchanged, while the Bank of England expanded its asset purchase program to £275 billion.  The ECB also announced it will buy 40 billion euros in covered bonds to improve funding conditions for banks.

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The chart above shows the year-to-date performance of major banks compared to the S&P 500 (NYSE:SPY).  As you can see, the banks have been in a steep decline throughout the year as the banking sector remains unstable and in question. US Treasury Secretary Timothy Geithner weighed in on the banking sector as he told the Senate Banking and House Financial Services Committee that there is “absolutely” no chance that another US financial institution would fail.

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Banks such as Morgan Stanley (NYSE:MS) have seen accelerating declines in share prices as Europe exposure to US banks continue to worry investors.  Earlier this week, Zero Hedge announced that, “The market just sent out the firm’s CDS up another 32bps to 528bps, the widest since 10/13/08 having only traded wider than this level from 9/16/08 to 10/13/08.” This brought a new perspective to those who claimed the banks were in better shape than 2008.

Although Timothy Geithner may have provided a boost to the banking sector on Thursday, his words may come back to haunt him once gain.  Just two months before the US would receive its first credit downgrade from Standard & Poor’s (NYSE:MCO), Geithner said there was “no risk” that the US could lose its AAA rating.

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