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 10 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 of their lows. And last week we saw their further benefits, in the form of second-quarter earnings that blew away Wall Street’s estimates.
Goldman Sachs stunned everyone on Monday by reporting a huge $2.7 billion second-quarter profit. On Thursday JP Morgan reported second-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 40 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 through the banking sector.
Even Bank of America, one of the fortunate too-big-to-fail lucky dogs, reported this week that its second-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 second 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; that is with the one-time gain from the merger omitted, which is 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 second 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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