Saving the big banks but destroying banking
There have been no obituaries. No eulogies. No burial services.
But this quarter marks the death of traditional bank at the big money center banks.
Oh, I know we’ve seen amazing earnings reports from the likes of Goldman Sachs (GS) and JPMorgan Chase (JPM) this quarter. But their profits came from things like trading.
From everything in fact but what you and I—and certainly the preceding generation—called banking.
And it’s exactly those huge profits from everything but banking that have put the final nail in the big banks as bank.
Goldman Sachs and JPMorgan Chase and maybe Bank of America and Citigroup too will survive as financial institutions. But they won’t be banks.
That’s important because hate them though we may at the moment, banks play an important part in making our economy go. And the withdrawal of the nation’s biggest banks from traditional banking leaves a gaping hole in our economy. Perhaps other banks—smaller national banks and regional banks—can fill that hole. But it’s not certain. (I’ll be taking a look at the regional banks next week.) The absence of the big banks from traditional banking won’t bring the economy crashing down, but it will make the economy less efficient at a time when we need as much economic efficiency as we can get.
The model for what these big financial institutions will be is laid out in the most recently quarterly earnings reports from Goldman Sachs and JPMorgan Chase.
Washington isn’t ready to let Bank of America and Citigroup out of the woodshed just yet
Shares of Bank of America (BAC) are under pressure today—down about 5.5% as I write this at 1 p.m.—on a Wall Street Journal report that the bank may have to raise billions more in capital before it can pay back taxpayer bailout funds.
Here’s the problem. Before the bank can replay the $45 billion it borrowed from taxpayers at the height of the financial crisis, federal regulators have to agree that the bank will be adequately capitalized after it repays the money. There’s no point, the government has decided. (and this makes perfect sense to me) if a bank, just to get regulators off its back (and so it can up what it pays to its executives) repays the bailout funds and then finds itself so weak that it has to come back to the government for another rescue during the next financial market hiccup.
In the case of Bank of America, the company borrowed $45 billion in taxpayer money and has raised $40 billion in capital since then. That’s enough, the bank is arguing. Wait a minute, government regulators have said, your credit losses continue to grow and you can’t predict, convincingly, when that bleeding will stop. We think you should raise more capital.
Citigroup puts lipstick on a pig in third quarter earnings report
Ah, bank accounting. I can’t think of any industry where the rules give a company more absolutely legal leeway to turn a terrible quarter into a good one.
Exhibit 1: Citigroup’s (C) October 15 third quarter earnings report.
The company reported a $101 million profit, absolutely astounding every analyst on Wall Street.
For all of 15 minutes anyway. The stock is down 6.6% for the day as I write this at 2:30.
Why didn’t anybody buy the turn-around story? After all this was a bank that posted a $2.82 billion loss in the second quarter of 2008.
Credit card defaults move up again in August
Credit card portfolios at the country’s major banks showed a rising tide of defaults in August. That pretty much wiped out the hope the July’s numbers, which showed a glimmer of improvement marked any bottom in bad loans for the sector.
Consumers. whose spending accounts for about 2/3 of U.S. economic activity, are clearly still in deep trouble.
Among the big three of credit cards, Bank of America (BAC) reported the highest level of write-offs at 14.54%. That’s up from 13.81% in July. Citigroup’s (C) bad credit card loans rose to 12.14% in August, up from 10.3% in July, and JPMorgan (JPM) saw write-0ffs climb to 8.73% in August from 7.92% in July.
The next banking crisis: Commercial mortgages
Heard enough bad news about failing residential mortgages to last you a couple of lifetimes?
Tired of headlines about huge losses at Citigroup and Bank of America?
Cheer up. The subprime, alt-A, and prime home mortgage meltdowns are about to be blown off the front page—by the meltdown in commercial mortgages. Commercial mortgages held by U.S. banks have been failing at the fastest rate in 20 years, according to the Wall Street Journal. Losses on loans to finance commercial real estate could hit $30 billion this year.
And you won’t have to hear more about problems at the huge banks that have dominated the crisis so far. The damage from commercial mortgages is worse, as a percentage of loans made, at regional and local banks. How much worse? Well, with three big regional banks, Zions Bancorporation (ZION), Regions Financial (RF), and KeyCorp (KEY) report earnings on July 20, 21, and 22, respectively, investors are about to find out.
