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Tuesday, January 22, 2008

"Every Major U.S. Bank Was Profitable Last Year"

John Berry says we shouldn't feel too sorry for banks, or worry that credit is about to dry up and ruin the economy [Update: After today's events, I'll be curious to see if John Berry, who has been more bullish (or at least less bearish) than many other commentators, changes his tune at all.]:

Every Major U.S. Bank Was Profitable Last Year, by John M. Berry, 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... 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. ...

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. Noting how quickly the bank has been able ... 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. ... The story is largely the same at Merrill Lynch & Co., the world's largest brokerage, though the losses are greater relative to its size. ...

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.

    Posted by on Tuesday, January 22, 2008 at 02:25 AM in Economics, Financial System | Permalink  TrackBack (1)  Comments (60)

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    » Major Banks Profitable in 2007--Who Woulda Thunk It? from Businomics Blog

    The largest banks in the country were profitable last year. Capital impaired? It's hard to be capital impaired when you're hitting record earnings. How does this square with all the bad news? The losses were largely in the fourth quarter [Read More]

    Tracked on Tuesday, January 22, 2008 at 10:02 PM


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