By: Costas Bocelli — December 9, 2010
UNLESS YOU’VE BEEN LIVING UNDER A ROCK, OR PERHAPS DETAINED IN SOME REMOTE PRISON IN PAKISTAN, YOU KNOW THAT WHISTLEBLOWER WEBSITE WIKILEAKS HAS BEEN TESTING THE IRE OF THE US GOVERNMENT AND NOW CLAIMS TO HAVE SOME SERIOUS DIRT ON A MAJOR US BANK.
What could this mean for the bank in question, and for the financial sector as a whole? What could it mean for the banking stocks in your portfolio?
I'll get to that below, but first a little background on the Wikileaks situation ...
Founded in 2006 by Australian Julian Assange, the non-profit organization has been causing headaches for their targets as it acquires and distributes information to expose oppressive government policy and unethical behavior around the globe.
A NOBLE CAUSE OR ULTERIOR MOTIVE?
Wikileaks' primary target until now has been the United States government. The website has published thousands of sensitive documents obtained by various anonymous sources, largely pertaining to the wars in Iraq and Afghanistan.
The latest cache of sensitive documents released by Wikileaks were a batch of e-mails from the US Department of State. The site claims to have over 250,000 such communications in its possession.
Last month, the first batch was released on the website, causing outrage, embarrassment, and concern for the US Government. These classified documents were never intended for public release, and many pose a threat to national security.
The Department of Justice has opened an inquiry to pursue possible charges that this organization may have violated the Espionage Act of 1917. Clearly, the US Government has finally been pushed to its limit and is firing back. As of this writing, the website has been shut down and access denied.
The non-profit organization is funded through a vast grass roots network that collects “donations” from people who believe in their cause. The funds are processed through companies like MasterCard and Visa ... until recently, when the funding was shut down.
Currently, Mr. Assange is detained in the United Kingdom after an international arrest warrant was issued in Sweden on alleged rape allegations by two females. At his arraignment on Tuesday, he was denied bail as he awaits an extradition hearing on December 14. Mr. Assange denies the allegations and insists they’re politically motivated to smear his credibility and inhibit his work.
Nevertheless, he’s been temporarily put on ice for now. He insists that his cache of leaks can continue to be distributed, and has threatened that his detainment could trigger a release of information that could potentially shock the United States' fragile banking system.
IS WIKILEAKS BLUFFING?
Based on the leaked documents so far, and on the credibility of the information that has already been disseminated, I would tend to take his threats seriously. The track record speaks for itself in acquiring information that should not be accessible.
So I believe it when Mr. Assange claims to have tens of thousands of documents in his possession from a major US bank.
He says, in fact, that the publications are powerful enough to prompt investigations and reforms, and to show an "ecosystem of corruption”. He likens the leaked documents to the internal Enron e-mails that helped fuel criminal prosecution of top executives after its collapse.
WHICH BANK IS THE TARGET?
When you talk about the major banks in the US, the short list is Citigroup, Wells Fargo, JP Morgan Chase, Bank of America, and probably Goldman Sachs.
So, which one?
Well, the price action usually leads to the answers. Below is a 10 day hourly chart on Bank of America (ticker: BAC) ...
On Tuesday, November 30, BAC sold off sharply in late day action as traders and investors concluded that Bank of America was the targeted bank. The stock sold off over 3% on heavy volume on the news of what Mr. Assange allegedly has in his possession.
Again, it shows the power and credibility he has gained, which makes him a threat. His comments moved a $120 Billion market cap company by 3%!
How damaging is the material in his possession? Supposedly he’s in possession of 5GB of information pulled from a hard drive of an executive at Bank of America. When and if it will indeed be released is still uncertain, and is yet another overhang on the stock.
However, since that day, when BAC made a fresh new low not seen since May of 2009, the stock has bounced from its oversold level. Yesterday, the stock closed up strongly at $12.00/share, up $1.05 from last Tuesday.
Bottom fishers, along with investors who believe the material will not be as damaging as advertised, are both bidding up the stock. The Financials as a group have rallied the last few sessions off of the sharp rise in long term treasury yields, which steepened the yield curve (a steep yield curve is very bullish and profitable for banks).
Below is a year-to-date chart on Bank of America (ticker: BAC) ...
The chart shows the bearish downward trend the stock is currently in. It’s making lower lows and lower highs. The red descending line illustrates this, and also acts as a key point of resistance. Also, the blue arrow shows the 50 day moving average (gold line), which is where the stock closed yesterday.
If the resistance holds, BAC should reverse and trade lower. Another important factor that will weigh on the stock is that we are approaching year-end and this stock is down 20%, which makes it a prime candidate for tax selling.
Bank of America has plenty of bad press lately from its shady mortgage practices and the foreclosure robo-signing fiasco.
What additional dirt Wikileaks has allegedly uncovered that is unique or criminal is still an unknown, but please spare me the publication of e-mails going back and forth between low level managers and loan officers bragging how they made thousands in commission charging points and high yield spread premiums on some poor old lady in the Midwest.
We know all the stories of the subprime mortgage lending of the past, it’s time to turn the page and move on.