The big banks are announcing “record profits“, which are a sham. Time says the banking crisis is over. Goldman, the strongest of the bunch, is proposing to sell new stock to the public before the sham is completely disclosed. With the Treasury’s help, they may just pull the heist off, but it won’t change anything in the end. More losses loom. The big banks aren’t fixed yet and they will have to be, before recovery can take place.
F. William Engdahl at Financial Sense writes about the concentration of risk in the big banks:
“Today five US banks according to data in the just-released Federal Office of Comptroller of the Currency’s Quarterly Report on Bank Trading and Derivatives Activity, hold 96% of all US bank derivatives positions in terms of nominal values, and an eye-popping 81% of the total net credit risk exposure in event of default.
The five are, in declining order of importance: JPMorgan Chase which holds a staggering $88 trillion in derivatives (€66 trillion!). Morgan Chase is followed by Bank of America with $38 trillion in derivatives, and Citibank with $32 trillion. Number four in the derivatives sweepstakes is Goldman Sachs with a ‘mere’ $30 trillion in derivatives. Number five, the merged Wells Fargo-Wachovia Bank, drops dramatically in size to $5 trillion. Number six, Britain’s HSBC Bank USA has $3.7 trillion…
The problem is concentrated in these five large banks. The financial cancer must be isolated and contained by Federal agency in order for the host, the real economy, to return to healthy function.”
Mike Whitney at Counter Punch is equally pessimistic about economy because the big bank problems have not yet been contained:
“The S&P 500 has soared 23 per cent in the last four weeks, but the current bear market rally is misleading. The prospects for a quick recovery are remote at best. The fundamentals are all weak. Corporate profits are down, GDP is negative 6 per cent, housing is in a shambles, and the banking system broken. The Fed has increased the money supply by 22 percent, but economic activity is at a standstill. The velocity at which money is being spent is the slowest since 1987. Nothing is moving. The banks are hoarding, credit has dried up, and consumers are saving for the first time in 2 decades. The banks’ credit-conduit cannot function properly until bad assets are removed from their balance sheets. But the magnitude of the losses make it impossible for the government to purchase them outright without bankrupting the country.
Geithner’s plan does not fix the problems with the banks, it only delays the final outcome. The next leg-down in the recession will push many of the undercapitalized banks into receivership. Geithner’s PPIP won’t change that. As housing prices fall and foreclosures rise, the capital position of many of the banks will become untenable leading to a rash of bank failures.”
Meredith Whitney believes much more must be done to increase loss reserves at the big banks for real estate and mortgages:
“In Whitney’s narrative financial firms will relive the worst struggles of 2008 because housing prices in the major markets will fall much further than expected. Bank of America ( BAC – news – people ), HSBC ( HBC – news – people ) and even the resilient JP Morgan Chase ( JPM – news – people ) will have to increase reserves as real estate losses mount unabated. Home price expectations for the banking industry play a critical role in their entire accrual accounting methodology.
As home prices fall and as unemployment rises, banks will have to retain earnings to fund greater reserve funds as part of a cycle that Whitney says has “no end in sight as both forecasts continue to rise quicker than expectations.” It’s a “never ending game of catch up,” she says because the banks have been underestimating losses ever since the credit crisis began a year and a half ago. The average bank thinks the total decline in housing prices was going to be 30% at the end of the first quarter. Now, says Whitney, they’re thinking more like 37% — still behind reality.”
Whitney does forecast positive earnings for 4 of the 5 big banks for full year 2009, but is much more pessimistic than the consensus:
Bank Whitney’s 2009 EPS estimate Consensus
GS $8.55 $7.95
BAC $0.04 $0.38
C $(5.00) $(1.18)
MS $0.55 $1.85
WFC $0.65 $1.18
