Some Wall Street talking head said today that the worst is over. Oh really. These "earnings" announcements don't really reflect that. This past week we have heard the Goldman Sachs, JP Morgan Chase, Bank of America and Citigroup all reporting a "profitable" second quarter. But don't be fooled by the hype. These reports of "profits" are certainly not an indication that the economy is improving or that these beneficiaries of tens of trillions of dollars of taxpayer money have survived the financial crisis.
These financial conglomerates have one big thing in common: the benefit of borrowing money from taxpayers at very low rates. They used this cheap money and made profitable trades in the market. In some cases they sold off parts of their business. That is it. They certainly didn't do anything to help the economy.
Let's take a closer look at these "profit" announcements:
Goldman Sachs Group Inc. posted record earnings as revenue from trading and stock underwriting reached all-time highs less than a year after the firm took $10 billion in U.S. rescue funds.
Goldman Sachs is a special animal. It was strictly an investment bank until it realized that it can profit from taxpayer handouts. In September 2008, Goldman Sachs applied and was quickly accepted as a bank holding company which made it eligible for the various government subsidies. The one subsidy it truly liked was the FDIC's Temporary Liquidity Guarantee Program(TLGP). TLGP allowed financial conglomerates, like Goldman Sachs, to issue bonds that were guaranteed by the FDIC - meaning that if Goldman Sachs were to default or couldn't pay on the bonds the FDIC would pay the bond investor. This guarantee was huge because it significantly lowered Goldman Sachs interest paid on the bonds. Goldman Sachs issued at least $5 billion of FDIC guaranteed bonds.
What did they do with this low cost capital? They used it to make profitable trades but did nothing to help the economy. Bottom line with Goldman Sachs is that their shareholders and executives were the only ones who benefited from the huge taxpayer handouts they received.
Here is a question for the Obama Administration: Will we bail them out again if their trading profits tank?
JPMorgan Chase & Co., the second-largest U.S. bank, said profit rose for the first time since 2007 on record investment-banking fees.
JPMorgan is a huge financial conglomerate and the big question is can they sustain their size on investment banking fees alone. Investment banking is a very volatile business. Clearly, JPMorgan has benefited from its takeover of Bear Stearns but is it enough?
Investment-banking revenue from trading and stock and bond underwriting is helping offset rising defaults on consumer loans, such as mortgages and credit cards. Dimon said he doesn’t expect the card business to make a profit this year or in 2010, and the company increased its loss projections for prime and subprime mortgages.
Bottom line for JPMorgan is that the "toxic assets" are still on their books and these "toxic assets" may become a real problem for the second-largest U.S. bank when (unfortunately) the unemployment situation in the U.S. gets worse.
Bank of America
One of the biggest zombie banks. From Reuters:
Bank of America Corp, the largest U.S. bank, posted a quarterly profit that topped Wall Street forecasts but warned of a fresh surge in soured loans to credit card, mortgage and business customers.
What helped them post a profit? Certainly not a recovering banking business but a one time event. The sale of one-third stake in the China Construction Bank Corp. which netted Bank of America $5.3 billion. Bank of America's banking side is horrible:
Bank of America set aside $13.38 billion for bad loans for a second straight quarter, and net charge-offs totaled $8.7 billion, up 25 percent from the prior three-month period.
This is bad and will probably get worse as unemployment increases. It is so bad that Bank of America has not been allowed to pay back its $45 billion tax handout. Can you believe that? Without the taxpayer handout they would be dead.
Citigroup Inc. posted a $4.28 billion profit, buoyed by gains from selling control of its Smith Barney brokerage and beating analysts’ estimates as the bank shed assets to compensate for loan losses.
Citigroup is selling off parts of its huge company like mad. The sale of its Smith Barney brokerage helped them this quarter. Excluding the Smith Barney sale Citigroup had an operating loss. But the rest of the story is the same as the other financial conglomerates. Consumer and business loan defaults are rising. Citigroup also remains under the watchful eye of federal regulators.
Profits are nice but must be put in perspective. The "toxic assets" that caused this financial crisis are still on their books. These financial conglomerates are still struggling despite receiving trillions of dollars of taxpayer money and subsidies. They dug themselves a huge hole. The challenge for us is at what point do they start contributing to growth of our economy and not just their shareholders and corporate executives. For policy makers, the challenge is at what point do you put these zombie banks out of their misery.