Betting the bank

Sometimes, as a personal finance writer, you run into situations where awful companies are actually kind of good investments. Which brings us to bank stocks.

Jamie Dimon, CEO, JPMorganChase
Jamie Dimon, CEO, JPMorganChase

If you care about people’s personal finances, you know that one of the worst things a person can do is get deeply into credit-card debt. It’s a long, painful and expensive workout that, for many people, only ends in bankruptcy.

And what makes credit-card debt particularly difficult is the interest rate, currently an average 15.91%, according to For those with poor credit — typically those who are in the most trouble — the rate climbs to 30% or more.

On the other hand, if you are interested in investments, you have to love the interest rate spread on credit cards. The highest-yielding one-year bank CD in the land yields 1.2%, Bankrate says. And, according to the Federal Reserve, the default rate on credit cards has fallen to 2.10% in the first quarter from 6.81% in the second quarter of 2009.

And, in fact, it’s a swell time for lenders generally, at least in terms of defaults:

  • Residential real estate default rate was 6.14% in the first quarter, down from a high of 11.26% in the second quarter of 2010.
  • Commercial real estate default rate: 1.41%, down from 8.77% in the second quarter of 2010.
  • Commerical and industrial loans: 0.74%, down from 4.36% in the third quarter of 2009.

Agricultural loans had a slight uptick in the first quarter, but remain well below their recession highs.

What would make things even better? An increase in interest rates. Banks typically hike loan rates much more quickly than they do deposit rates.

The one fly in the ointment is large banks’ criminal tendencies, for which they have been paying breathtaking fines. Now, it may well be that they are even now engaging in making bad loans or doing illegal things. But the glory of investing in banks is that it takes years for investors to discover these things — and in the meantime, banks blithely report increasing earnings.

Probably the best way to invest in banks is through a diversified fund. One good index fund: SPDR S&P Bank ETF (KBE), up 4.35% this year. But pay off your credit cards first.

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