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Library Home Street Smart Report Home BEING STREET SMART by Sy Harding ALL BUSINESSES SHOULD BE LUCKY ENOUGH TO BE BIG BANKS! July 17, 2009. The
half-dozen or so banks that became too big to fail have had it good. They
received $billions in taxpayer bailout money and loan guarantees, were hand-fed
lucrative deals to take over the choicest parts of less fortunate competitors,
were allowed to exchange some of the toxic waste assets on their books with the
Fed for Treasury bonds, and have been able to hire the best of the many newly
unemployed bankers and traders. Lucky
dogs. They haven't been forced to return to lending as a primary source of
business, leaving the economy stranded with the problem of unavailable credit,
instead using the bailout capital to make lucrative acquisitions, and for market
trading. Both Goldman and Morgan are on the list of the ten top 'program-trading' firms each week. Program-trading (large financial firms
trading for their own accounts), make up close to 40% of all trading on the
NYSE. Their
stocks have soared 100% and more off their lows. And this week we saw their
further benefits, in the form of 2nd quarter earnings that blew away
Wall Street's estimates. Goldman
Sachs stunned everyone on Monday by reporting a huge $2.7 billion 2nd
quarter profit. On Thursday JP Morgan reported 2nd quarter earnings
that were 36% higher than last year. But
what about the other 8,000 FDIC-insured commercial banks in the U.S.? They
should be so lucky. They
have been failing at a rate of two per week over the last five months, a total
of fifty-four so far, stuck in a swamp of bad loans and rising defaults, with no
place to turn. The FDIC has approximately 350 more on its growing 'troubled-bank watch list'. More troubling, many of the banks that have
already failed and are now on the FDIC's 'failed bank' list, weren't on
its 'watch list' prior to their sudden failures. And
no wonder they're having problems. Trillions
of dollars of household wealth has disappeared in the housing meltdown and two
severe back-to-back bear markets in stocks, leaving a record mountain of bad
debts choking the banking system, and an economic crisis unlike any in 75 years.
If
we adjust our vision to see around the towers of Goldman Sachs and JP Morgan,
out into the landscape beyond, it's not a pretty picture, not even in the
financial sector. The
looming bankruptcy of CIT Group, the large lender to small and medium size
businesses, is mostly being ignored in the optimism over the stunning profits
announced by Goldman and JP Morgan. But the potential fallout is considerable.
CIT is the primary lender to 300,000 retailers and 1,900 manufacturers that
apparently fall into the category of being small enough to be allowed to fail.
And many are near panic, with suppliers refusing them credit until they line up
new lenders, a difficult task, just as they were beginning to stock up for their
important back-to-school and holiday seasons. The
rumor Friday was that a couple of the lucky dog banks are being 'encouraged'
to provide CIT with short-term financing. So perhaps the bankruptcy will be
avoided. But that does not diminish the problem of the crush of loan defaults
that created its problems, and is causing similar problems throughout the
banking sector. Even
Bank of America, one of the fortunate too-big-to-fail lucky dogs, reported this
week that its 2nd quarter earnings declined 5.5% on continued credit
problems. The bank said its write-downs of defaults on credit-cards soared 28%
to $2.06 billion. Lucky
dog CitiGroup reported it swung to a profit of $4.28 billion in the 2nd
quarter. But that was due to a one-time gain of $6.7 billion related to the
merger of its Smith Barney brokerage firm with the brokerage operations of
Morgan Stanley, which was part of the bailout efforts. The company conveniently
did not report its loss from ongoing operations yet, that is with the one-time
gain from the merger omitted, which would be standard reporting procedure. Economic
bellwether General Electric reported that its earnings plummeted 47% in its
second quarter, on continuing problems in its large financial divisions,
including GE Capital (as well as declining activity in its non-finance
divisions). In recent months GE cut its dividend for the first time in 60 years
and lost its AAA debt-rating. But of course, somehow the 47% lower earnings beat
Wall Street's estimates, and the stock rose on that 'good' news. What
if in a few months bankrupted but bailed-out General Motors and Chrysler report
stunning earnings? Will the fact that they did so by laying off tens of
thousands of employees who have not been able to find new jobs; paying their
remaining employees less; and wiping out debts to their suppliers via the
bankruptcy route (putting many of them out of business permanently), be a sign that the economy is in
good shape again, or just that it worked out well for those two lucky dog
companies? Yet
that type of analysis was applied this week to the fact that Goldman Sachs and
JP Morgan made stunning profits in the 2nd quarter. All
banks should be lucky enough to be big banks. And all businesses should be lucky
enough to be General Motors and Chrysler. Unfortunately
for the economy 99.9% are not. As
economist Laura Tyson said this week, "We are in a balance sheet recession. We
haven’t had this kind of recession in the lifetimes of most forecasters. And
by the way, the models that forecasters are using are the same models that
missed the fact that we were even going to have this recession. So let's admit
to a lot of uncertainty here." Of
course the stock market doesn't like uncertainty, as it most recently
demonstrated last year, and in the first quarter of this year. But
if Wall Street can continue to deny the existence of uncertainty, instead
insisting that profits by a couple of big bailed-out banks indicates the rest of
the financial sector is out of the woods, and that it even signals the overall
economy is out of the woods, then who knows what they can accomplish in firing
up the stock market?
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