Tuesday, January 22, 2008

Every Major U.S. Bank Was Profitable Last Year

Commentary by John M. Berry

Jan. 22 (Bloomberg) -- 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.

``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.

`Japanese Situation'

Noting how quickly the bank has been able to raise money to replace the capital depleted by losses, he added, ``Why would anybody buy stock if they thought Citi was going down the tubes?''

``And this is nothing like the Japanese situation,'' Litan said. ``In that case, the banks sat on their losses and were unable to make loans. That's just not where we are now.''

During the 1990s, former Federal Reserve Chairman Alan Greenspan and other Fed officials advised Japanese regulators to push the banks to write off their bad loans, recapitalize themselves and get back to business. That didn't happen for years, and after it did -- and Japanese corporations also cleaned up their balance sheets -- economic growth resumed.

So instead of just moaning about how much some institutions have lost, everyone also should be applauding that the potential losses are being recognized and new capital is being raised.

Merrill's Losses

The story is largely the same at Merrill Lynch & Co., the world's largest brokerage, though the losses are greater relative to its size. It reported a fourth-quarter net loss of $9.83 billion after writedowns of $15 billion on assets related to subprime mortgages and hedges. It also had a full year loss of $7.8 billion.

Merrill also has raised substantial capital from outside investors and additional cash from selling assets.

Some analysts tracking the growing losses on subprime mortgages and assets tied to them, such as collateralized debt obligations, have added all the writedowns to their tallies.

What they should also do is to acknowledge that for the most part the losses, other than those on the mortgages themselves, represent gains to investors who bet the other way. Among them are Goldman Sachs Group Inc. and hedge-fund manager John Paulson.

Goldman Sachs avoided big losses on subprime-related investments by hedging its positions. Its net income for 2007 was a record $11.6 billion.

Mortgage Rates

And a Nov. 29 Bloomberg News story about Paulson said his Credit Opportunities funds rose an average of 340 percent in the first nine months of 2007 on bets against subprime. That earned Paulson an estimated $1.14 billion in performance fees for that period, and fees on Paulson's other eight funds brought his total to $2.69 billion.

Credit isn't as readily available as it was for several reasons, including a less favorable economic outlook, tighter lending standards, particularly for mortgages, and a lack of a secondary market for some types of loans such as jumbo mortgages.

On the other hand, the interest rates many borrowers are paying have dropped. The bank prime rate, to which many loans are linked, is 7.25 percent, the lowest since January 2006.

As of Jan. 17, the average interest rate on 30-year fixed- rate mortgages dropped to 5.69 percent, the lowest level since June 2005.

In the two weeks ended Jan. 18, corporate borrowers sold $50 billion worth of investment-grade bonds at the lowest interest rates since April 2007.

The credit well hasn't run dry and it's not about to. And the nation's banks will be supplying a large share of it.

(John M. Berry is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: John M. Berry in Washington at jberry5@bloomberg.net

Last Updated: January 22, 2008 02:39 EST

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Lunch is for wimps

Lunch is for wimps
It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another.