Thursday, January 15, 2009

U.S. Banks Still in Trouble--and Obama Has a Mess on His Hands

Sources: Financial Times, Bank Shares Plunge on Wall Street; Washington Post, Continued Bank Losses Complicate U.S. Rescue; New York Times, Bank of America May Receive More Bailout Money; New York Times, JPMorgan Reports Slim Profit in Tough Quarter

Predictions that 2009 could be a worse year for banks than 2008 was are ringing true so far this week. Bank of America’s market price plunged on Thursday morning as calls for government intervention grew louder, and several firms are announcing worse-than-expected losses in 2008’s fourth-quarter.

Even JPMorgan’s “good” news did not help the situation in the markets. The firm announced that its fourth-quarter losses were not as bad as analysts had feared—and reported a $702 million profit in what many analysts predicted would be the toughest quarter of the year. JPMorgan still has many challenges to overcome, most notably related to orchestrating two complex mergers at once (Bear Stearns and Washington Mutual).

That major banks are still in trouble and wreaking havoc in the global markets is bad news for the incoming Obama administration, who had publicized plans to allocate what remains of the $700-billion bailout (which Congress passed in October 2008) to aid struggling small businesses, homeowners, and municipalities. The first part of the bailout program funding went to replacing the money that major financial institutions lost in 2008—but with those firms reporting worse-than-expected fourth-quarter losses, many of them are looking to the government for another round of help. Obama advisors are planning on devoting the second half of the original bailout and an $850-billion stimulus package to restoring health to financial markets and the slumping economy.

Congress has yet to approve the last half of the bailout for TARP (Troubled Asset Relief Program), despite the Obama administration’s urging it to do so. Many lawmakers are upset over the Bush administration’s management of the program; the Senate is set to vote on the measure today. Meanwhile, members of Obama’s administration are working on a way to overhaul the management of the global financial system.

Questions for discussion:

Do you think major financial institutions, which have already received hundreds of billions of dollars in federal aid, should receive additional bailout money? Will a stimulus package aimed at consumers and small businesses be more useful? Where is the money going to have the biggest impact?

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