Friday, April 17, 2009

Is the Cloud Over the Banking Industry Lifting—Or Is This Just the Eye of the Storm?

Sources; NYTimes, Banking Industry Showing Signs of a Recovery; Associated Press, Citi Results Top Street Forecasts, But Shares Fall

Four banks announced positive earnings news this week—Citigroup, JPMorgan Chase, Goldman Sachs, and Wells Fargo—signaling a glimmer of hope for the banking industry’s recovery from a serious financial crisis that left credit markets frozen and left investors holding a handful of near-worthless securities. JPMorgan Chase reported $2.1 billion profit in the first quarter, with revenues up 45% from last year—and Citigroup, while it still reported a loss, reported earnings higher than forecast.

Financial-sector officials say that there are still weaknesses in the system. Millions of homeowners are still defaulting on their mortgages, home-equity loans, and consumers continue to default on credit card payments. The commercial real-estate sector is just starting to feel the blow of the recession—General Growth Properties, one of the nation’s largest mall operators, filed for bankruptcy on Thursday, for one of the largest collapses in history.

Still, banking institutions seem poised to continue down the road to full recovery—and many are eager to get rid of their debt from federal bailouts. One JPMorgan official noted that if the bank wanted to pay back its loan from the federal government tomorrow, it could—“We have the money,” he said. Low interest rates are encouraging many new homeowners to take out mortgages, and commercial and investment banks are acting with cautiously optimism, storing away millions in reserves in order to be ready for the next wave of losses. The overall sense is that until prices stabilize and unemployment peaks, banks will be concerned about losses on their balance sheets.

The Treasury is expected to release “stress test” findings on May 4, detailing which banks will be likely to sustain their earnings and survive the ever-present volatility in the system. The findings are expected to reveal that some banks may need to raise fresh capital—from private investors, but also by converting the preferred shares of stock currently held by the government (exchanged in bailout transactions) to common shares to sell to the public and other investors.

Question for discussion:

Does the banking industry’s positive numbers signal a larger recovery for the rest of the economy? Or do the positive earnings reflect only the effects of the government’s bailout efforts?

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