Friday, July 17, 2009

Bank Profits Soar Even Though Business is Bad

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The Nasdaq hit a new high yesterday for the rally that began in early March. All the indices have had major rallies in the last several days, rising off a technical picture that indicated extreme weakness. Good earnings news, starting with Goldman Sachs and followed by the other major banks and brokers, bulled the market up. While the headline numbers look good, the rest of the picture indicates business is still deteriorating.

The two poster children of big bank insolvency, Bank of America and Citibank, released earnings today. Both had huge profits, but not because of their lending, which is what they are in business to do. Bank of America claimed a $2.42 billion profit, despite continued losses from failed loans. The bank had to increase its loan loss provisions by $13.4 billion. JP Morgan Chase also had increases in failed loans when it reported earlier. So how did these banks make money? It came from their trading businesses. Goldman also made huge profits from its trading business. It looks like all the big financials are making lots of money from their trading businesses. I wonder where all that money is coming from? Well, I guess it's good to have friends at the Fed and U.S. Treasury.

Citibank reported a profit of $3 billion, but only because it had a $6.7 billion gain on the sale of Smith Barney. As long as it can continue to sell Smith Barney every quarter, it's earnings will hold up. If not, it could be in trouble. Citi also recorded gains on assets that had lost value during the Credit Crisis, but which it claims are gaining back their value. In case you forgot, Washington changed the accounting rules awhile ago to allow the big banks and brokers to create an illusion of prosperity where none really exists. For some reason 'make believe' accounting didn't work for Bear Stearns, which literally went out of business overnight.

The banking system will not be healthy again until banks are lending and making money from their lending operations. This has not happened yet and increases in loan loss provisions indicates things are still getting worse, despite the half a dozen Fed programs to take these bad loans away from the banks. At this point, Bernanke has had two years to deal with this problem and he has yet to show any success with his give-away programs. His efforts have only helped the big banks cover up the existing problems. His side kick Geithner is now busy forcing CIT into bankruptcy, even though it lends money to a million small and medium size businesses. That's certainly going to help get more loan money into the economy. For those of us who want things to get better, 'make believe' seems to be the only option left open. Maybe we should close our eyes and try to wish hard enough.

NEXT: CIT - Last Minute Reprieve

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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