Bank Profits Hide Looming Problems

NEW YORK (AP) -- The big banks are making big money again, but they won't be back to health as long as they have to deal with a recession and customers defaulting on mortgages and credit cards.

he impressive numbers included a $3 billion second-quarter profit announced Friday by Citigroup and $2.4 billion for Bank of America. They followed similarly robust earnings for Goldman Sachs and JPMorgan Chase.

That the banks managed to turn a profit at all is remarkable. Just 10 months ago, many of them looked to be on the verge of collapse. The stock market staged a huge rally this week, driven by the signs of health in banking.

But Bank of America CEO Ken Lewis had some sobering words during a conference call with Wall Street analysts after his company's results were released Friday: "Profitability in the second half of the year will be much tougher than the first half."

Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc. earned profits this spring largely on investment banking and trading -- not traditional banking businesses, which still look shaky. Citi benefited from selling its majority stake in the Smith Barney brokerage.

Strip away those money-makers, and the banks have to rely on customers who are losing their jobs or earning less money. The banks will suffer as long as their customers do.

Bank of America, JPMorgan Chase and Citigroup Inc. all reported they lost more money on loans during the second quarter. Bank of America alone set aside $13.4 billion to cover loan losses. But the banks also saw signs that loan delinquencies were starting to stabilize.

Celent analyst Isabel Schauerte said Bank of America's earnings tell the story of the financial industry.

Story continues below

advertisement

"B of A's results are the bellwether of where Main Street is headed. Measured by credit losses, a moderation of default rates is not in sight," Schauerte said. "For the investment banking business of B of A, in contrast, the worst days seem to have passed."

The profits announced this week raise more questions about when banks will be able to repay their bailout money. Goldman Sachs and JPMorgan Chase have already repaid their loans. Others, like Bank of America and Citigroup, have not.

"Moving forward, companies that are solvent and performing should be held to the promise to repay the taxpayers with interest," said Rep. Darrell Issa of California, the top Republican on the House Oversight and Government Reform Committee, which is convening a hearing next week on bailout oversight.

The banks that reported earnings this week cited similar trends:

-- Mortgages: Bank of America's second-quarter revenue was bolstered by a spike in mortgage refinancings as interest rates tumbled early in the quarter. But rates have been climbing lately, and analysts expect that surge in refinancings to taper off. And more people are defaulting on mortgages.

-- Credit cards: Credit card losses tend to track the unemployment rate, and banks are expected to keep losing money on credit cards as more people lose their jobs. JPMorgan Chase, Citi and Bank of America all have huge credit card operations.

-- Investment banking: By far the quickest recovery in the banking business has come in the investment banking sector, helping Goldman Sachs earn $2.7 billion in the second quarter. Some of the rebound has come from the big stock market rally this spring. Companies also did well because there's less competition since Lehman Brothers and Bear Stearns went under.

Analysts say that besides the problems with loans, bank earnings may suffer because the country has less of an appetite for debt.

-- Commercial real estate: While home foreclosures are increasing, the commercial real estate market is expected to keep causing loan losses for banks. Rising store and office vacancies are cutting into landlords' and developers' cash flow, and leading them to default on their mortgages.

AIeva M. Augstums reported from Charlotte, N.C. Associated Press Writer Anne Flaherty in Washington, D.C., also contributed to this story.

Get HuffPost Business On Facebook and Twitter!

Comments

[Harrier]

If 1 of every 5 mortgages have people who are paying more than their homes are worth, you have a serious problem. It is not something I would continue to pay for and it would be a good time to play hard ball with the lender. It is for that reason and the expected unemployment expected to increase through next year that makes me a non-believer. I would like to know, how many mortgages have been written down, how many were sub prime and how many sub primes have been renegotiated and still being paid on.

[selective]

Bank of America this week was cautious about its future business..­.yet what was unspoken was its return to stability, as was evident in the quarterly reports of other banks as well. The key to this stability right now, has been and is, raising money and building cash reserves against losses, something many many individuals and families have been doing as well. Maybe then the tech industries will spur growth, increase productivity and gain new efficiencies and lead us out of this mess.

Just think, if the economy healed itself like this, we wouldn't have to listen to these Congresspeople and demagogues like Obama, they would be irrelevent. I think it's shameful to be arguing about health care when the very economic engine of the country is still in some doubt, it's out of perspective.

[youtubeit]

this economy is in such deep *&^ yet Obamma & Summers live on another astral plane, unwilling to acknowledge reality, even though 995 of Americans experience and know what's going on, and are tired of the BS.

good articles: http://www.iamned.com

[LemonMeringue]

"We are grateful to the Washington Post, the New York Times, Time Magazine and other great publications whose directors have attended our meetings and respected their promises of discretion for almost forty years." He went on to explain: "It would have been impossible for us to develop our plan for the world if we had been subjected to the lights of publicity during those years. But, the world is more sophisticated and prepared to march towards a world government. The supernational sovereignty of an intellectual elite and world bankers is surely preferable to the national autodetermination practiced in past centuries.­"

-attributed to David Rockefeller at the June 1991 Bilderberger meeting in Baden Baden, Germany (a meeting also attended by then-Governor Bill Clinton and by Dan Quayle).

[DiogenesOfAlaska]

The outrage concerning bonuses and outsized profits hides once again what should REALLY be on the table:

assuming that some banks indeed made big profits (with or without large government subsidies being part of those profits or enabling them), what should they be doing with it?

Like any firm, they can do many things, among others:

- pay higher dividends,
- improve their capitalization
- decide to be more realistic and foreward-looking about write-offs of doubtful assets
- or: take the money and run.

Even absent fraud, absent government subsidy and absent conspiracy theories, there still remains the fact that the choices made AFTER the profits have been locked in are NOT the prudent ones... AGAIN.

And why is this so? Why is it still possible? Because they are such smart risk managers?

How about some folks look up the distinction between an entrepreneurial firm and a firm with outside equity. And the definition of moral hazard.

As many others have said: it's stupid enough that cheap loans to high risk borrowers (like: banks) are made by the government. But to view this as proof of 'talent' is really in the boy-scout league.

[TJCole]

After this instance of our banks and financial institutions showing they are corrupted and reckless irresponsible degenerate gamblers and manipulative predatory speculators and usurious ghouls we needed to Change the Banking Culture reform it and Nationalize it..!

This was our opportunity to adjust and adapt for the future, and have banking serve the nation and economy while still turning a profit yet that which serves the greater good....in­stead Bush and Obama rewarded their villainy and deceit and enabled them to continue to constrict our economy while turning huge personal and corporate profits, at the expense of our Republic and We The People...!

We voted for Change, we got more insider corruption­...!

[CarmanK]

All those big bonuses for all those employees!!! For all those companies that made profits.
Bank of America advertised in Time Magazine that they helped to keep 100,000 homeown ers in their homes. That seems like a low number to me considering that they have taken over countrywide. Why is the congress letting these banksters get away with this. They have endangered our nation, they are the equivalent of financial terrorists. They need to be stopped and the American people need to be armed with a Consumer Financial Protection Agency, reasonable credit card interest rates and fees and real bankruptcy prototection. Geithner has failed to rein in their risky behavior. The congress has to take action against these Wall Street muggers and soon.

[selective]

I don't believe your point, but kind of did until very recently.

There's something right and true about America that even the robber barons and the demagogues can't destroy and we are making a comeback. But the pol's are missing it, due to too much speech-making which is taking the place of their brains. The country is still here and is going on, and moving on, from where these others are still stuck.

The war to think of that's relevent here is, the American Revolution. We are in a revolution.

[not going2take it]

The board explains the the body of employees . . .
on the vow of secrecy, as they are all complicit in the crimes

OK folks we have one more chance to really score
on this system that we have rigged before

they take it right down the toilet ! as planned !
they are going to make every stinking step count!

[not going2take it]

D - I - N - G !

(now I will read the article)
Great headline BTW!

[Lilith33]

Gee they let them hide their toxic assets and thats a problem?
and they are still playing the same games that got us here?
How could anything go wrong with that?

[ErnestineBass]

They have to break the dollar, Lilith.

Until they do, the Amero will never be accepted.

[platanoman]

tinfoil hat for u

[not going2take it]

I am with you EB they are going to kill our currency. As we know of it.

Make traditional credit cards an non viable option (as is happening now)
proven not to work, as the fees are to high (planned - orchestrated)
and reset the system, create new one (change decimal points...)
a monetary system factored form the start.

[tomasedison]

move to Red China they love capitalism

[breakingpoint]

These banks stole our savings our pension our 401ks stealing our future

they are buying up the commodities and resources around the world for their own ill gotten gains with your money that you will never see again

they should be in prison.

[Haditup2here]

Why is this even news with the roll-back of Mark-to-Market and the shielding of Toxic Assets?

[ErnestineBass]

The entire point of this exercise, dear, is to keep us all hopping from one foot to another whilst the international bankers further consolidate power by ridding the world of national currencies.

Google "Euro", "BRIC" and the "Amero".

European countries fought against establishment of the "Euro" for decades, all to no avail. The next multi-national currency consolidation may be the "BRIC", and sooner or later, the dollar will probably give way to the Amero.

In some ways, establishing "consolidated regional currencies" makes a certain amount of sense because they essentially do away with the need for arbitrage, meaning the ups and downs of the global economy become easier to predict and manage.

On the downside, they also make it easier for "large players" to set standards for worker wages and manipulate commodity markets.

If nothing else, we are certainly living in interesting times. 8-/

[Rule Of Law]

"Goldman Sachs and JPMorgan Chase have already repaid their loans. Others, like Bank of America and Citigroup, have not."

WHY do they keep saying this when it is not true?!

[JBS]

Google "Propaganda" - repetition and the big lie

[Rule Of Law]

LOL! My bad. I forgot where I was for a second.

[PhilipTaylor]

The MASSIVE ELEPHANT UNDER THE TABLE:

Anyone can show a Mammoth Profit if you FAKE IT Using Legalized Illegal Accounting!
Even ENRON did it!

So is $2.72 Billion larger than $81 Trillion? NO! Well Then they are Bankrupt!

Without "MARK-TO-MARKET" they exaggerate the Value of the Derivatives "On the Balance-Sheet" while JPM/CHASE has Toxic Derivative Debts of $81 Trillion all conveniently hidden!

Accounting is totally FAKE and how can analysts ignore the MAMMOTH IN THE ROOM - unless they are paid to!

Federal Agency, the 0ffice of Comptroller of the Currency, 0CC, issues a quarterly Report that has the following info:

1 JPM0RGAN $81TRILLION in Toxic Derivatives
2 BofA $78TRILLION
3 G0LDMAN $48TRILLION
4 M0RGAN $39TRILLION
5 C1T1GROUP $32TRILLION

http://www.occ.gov/ftp/release/2009-72a.pdf
Page 23!

Why save these 5 WS MAMMOTHS who have OUT-LIVED their TIME with their $30+ Trillion Each in Toxic Derivatives!

When did it sound like a good idea to have "OFF-BALANCE-SHEET" accounting? Wasn't it ENR0N?

Glass-Steigel them!

Divide them up and get rid of the JUNK at the expense of the Stakeholders!

Bye Bye TOO-BIG-TO-FAIL!

[sloreader]

You got that right, the Mammoth's fur ain't worth strokin'.

[PhilipTaylor]

Wikipedia: The "Enr0n loophole" exempts most over-the-counter energy trades and trading on electronic energy commodity markets from government regulation.

That was how it started but Wall Street took it MUCH FARTHER! In fact "Around the WORLD!"

Since the Enron scandal companies that have any kind of off-balance-sheet items, whether justifiably or not, are being branded with a scarlet letter "E"nr0n.

http://www.investopedia.com/articles/analyst/022002.asp

While, Generally Accepted Accounting Principles (GAAP) and tax laws allow off-balance-sheet entities for valid reasons, many bad things happen when economic reality differs significantly from the assumptions that were used to justify the off-balance-sheet entity.

Problems also occur when egos get too big. Enron and Wall Street exemplifies how ego can be the basis for the misuse of off-balance-sheet items. Here, off-balance-sheet vehicles appear to have been used to pump up financial results rather than for legitimate business purposes. What started as a plan to legitimately use off-balance-sheet vehicles morphed into ways to manufacture earnings as trades went bad. While one could argue that this is also a case of economic reality differing from expectations, the way management reacted to the situation allows us to classify it as an ego thing.