It’s time to stop worrying about the banks.
[img]467|left|||no_popup[/img] They don’t need any more taxpayer help or handouts. They’re doing fine.
First, Wells Fargo reported that it turned a $3 billion profit in the opening quarter. Next, Goldman Sachs says they’re so profitable that they’re ready to start paying back TARP and the U.S. taxpayers.
Then this morning, J.P. Morgan Chase, America’s second largest bank by assets, posted a $2.14 billion dollar first quarter profit.
Even though the earnings at J.P. Morgan were 10 percent lower than last year for the same reporting period, bank CEO Jamie Dimon says that his company could pay back the $25 billion it took in rescue monies from the federal government “tomorrow.” He said he just awaiting guidance from the Treasury Department.
Memo to Jamie: Write the check.
Dimon is eager to repay the government funds because it would free the bank from compensation restrictions and other oversight that was tied to the bailout money. It’s also clear that he felt pressure from rival bank Goldman Sachs, which raised $5 billion this week in a share sale as a first step pay back the $10 billion it took from the government.
Here Come More Foreclosures
While Citigroup and Bank of America have yet to report their earnings, it is plain that solvency and lending no longer are problems for these major banks.
Three and half weeks ago, Citigroup’s CEO Vikram Pandit disclosed that, despite nearly $88 billion in mortgage write-downs, his bank was profitable during the first two months of the year. Bank of America’s Ken Lewis has sounded a similar optimistic tone.
There is no question that now that the temporary bank moratoriums have ended, the economy soon will see a spike in U.S. foreclosure filings. First quarter filings already are at a record 24 percent higher than last year as employers have cut salaries and jobs.
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Clearly, however, the big banks now are positioned to weather this storm.
It is the smaller regional banks that will continue to be at risk. But many of these will fall under the rubric of the FDIC, which already has closed and successfully sold or liquidated two dozen banks so far this year.
With interest rates at historic lows, the banks are demonstrating they can make money based on the present yield curve – the profit on the spread between the cost of borrowing and the eventual return to the lender.
In other words, they don’t need our help any longer.
The real problem in the economy is not lending, it’s demand.
We heard from President Obama during a Tuesday talk at Georgetown University about his economic strategy. He outlined plans to build an economic foundation based on new rules. These include reforms on Wall Street, new investments in education, health care and technology, and new savings in the federal budget.
But the President failed to talk about reigniting demand.
Seventy percent of this economy is driven by consumer demand. Without the resurgence in demand, the economy will continue to founder, no matter how many reforms the President puts into place. With only $110 billion remaining in the TARP bailout fund, it is likely that Treasury Secretary Tim Geithner is preparing to return to Congress for more bank bailout money. He’ll probably bring the results of the recently completed bank “stress tests” to demonstrate that the nation’s biggest financial institutions continue to be insolvent.
Congress won’t be happy. But, the odds are that it will go along, and cough up another $300 billion to $500 billion.
That would be a mistake.
Why Secretary Is Wrong
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Geithner believes the only way to rescue the economy is to get the big banks to lend money again. But he's wrong.
Most consumers cannot and do not want to borrow more money.
They're still carrying too much debt. Even if they refinance their homes, courtesy of the Fed flooding the market with so much money, mortgage rates are dropping — consumers still are not going to borrow more.
On the other side of the equation, businesses aren't ready to borrow more to invest in new plants or machinery because there still is a lack of demand for their products.
If Congress and the President are going to spend more money, they must focus their attention on stimulating demand.
Congress and the President don’t need to give more money to banks. Any new federal allocations must be directed at the demand side of the economy, not supply.
The banks are going to be okay.
No more bailouts. They don’t need them.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
