Despite Writeoffs, Major Banks Made Money In 2007
Kurt Brouwer January 25th, 2008
This piece from Bloomberg [emphasis added below] caught me by surprise. Despite all the huge writeoffs last year, all major U.S. banks were still profitable. This does not get into how they are doing this year. Nonetheless, this piece was illuminating:
Every Major Bank U.S. Bank Was Profitable Last Year (Bloomberg, January 25, 2008, John M. Berry)
With all the large writedowns and losses announced for the fourth quarter, hardly any attention is being paid to just how profitable U.S. banks really are.
That inattention has raised unnecessary concerns that the banks may be so crippled by losses that they will cut lending to the point it might undermine the U.S. economy.
Some commentators have said the banks are in the worst shape since the Great Depression. That isn’t close to being correct.
Other analysts have raised the specter of the stagnant Japanese economy of the 1990s, when banks there were crippled by huge losses when a real estate price bubble burst at the beginning of that decade. This comparison also is off base.
Even Citigroup Inc., by far the hardest hit of the big U.S. banks by subprime-related problems, earned $3.62 billion last year. That was with a $9.83 billion fourth-quarter net loss and more than $22 billion in writedowns and additions to loan-loss reserves.
For JPMorgan Chase & Co., the third-biggest U.S. bank, the focus was on the 34 percent drop in fourth-quarter profits from a year earlier. Its full-year $15.4 billion profit, a record, was largely ignored. So were the bank’s record annual revenue of $71.4 billion and its record earnings per share of $4.38.
Bank of America Corp., the nation’s second largest, plans to report earnings today. Analysts surveyed by Bloomberg estimate that the bank was profitable in the fourth quarter, as well as the full year…
Seidman Compares
William Seidman, a commentator at CNBC who headed the Federal Deposit Insurance Corp. from 1985 to 1991, said the situation now is nothing like that period, when hundreds of banks and thrift institutions went broke.
They only identify Bill Seidman as the former head of the FDIC, but he was also the first chairman of the Resolution Trust Corporation, which was tasked with dealing with all the defunct banks and savings & loan companies in what we now call the S&L crisis. I had the honor of meeting him and chatting with him at a PIMCO conference a number of years ago. He was in the frontline of the S&L crisis and he is eminently qualified to compare this banking crisis with that earlier one.
“The banks are not in anywhere near the trouble they were in when I was at the FDIC,” Seidman said in a Jan. 17 interview. The handful of banks the FDIC regards as troubled today don’t include any big ones, he said.
One should be cautious, though, and make sure institutions aren’t cutting into their capital by paying dividends beyond what they’re earning, he added.
Economist Robert E. Litan, a senior fellow at the Brookings Institution who has done numerous studies of the U.S. financial system, said the banks are in far better shape than the dire assessments suggest.
“Strip out the losses and Citi could make close to $10 billion a quarter,” Litan said…’
Clearly, the major banks have problems. For example, it remains to be seen how bad the banks subprime losses really are (see Falling Home Prices Trigger Banking Crisis). However, this story is indicative of how profitable banks can be when they don’t screw up.
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Considering that the latest deal President Bush and the House have engineered has FannieMae and FreddieMac upping their limits on loans to $625K, I have to think there would be a selling frenzy of CDOs to those organizations. Thus, the banks’ losses may not be that much greater for much longer.
Of course, in about two years, we may see a proposal for the taxpayers to provide additional capital to Fannie/Freddie. I’m not so sure I’d want to be a politican proposing that one in 2010.
I am not that worried about the markets now. Most of the bad news are out now. I think that we are in some kind of flat correction.
Although in real terms the stock market may not get higher (because the value of the dollar keeps going lower) I would expect a new wave of manic buying during 2008 and 2009. It is a bubble economy, after all.