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December 05, 2012

Banks Rake In Profits – Largely From Government Supports

Posted in: Uncategorized

It goes without saying that you should not weep for the banking industry. In the years following a Great Recession they caused, they still manage to churn out record profits. This is the 13th straight quarterly rise in profits for financial institutions.

The industry’s third-quarter earnings jumped 6.6% from the same period in 2011, to $37.6 billion, the Federal Deposit Insurance Corp. reported Tuesday. It was the 13th straight quarter of year-over-year increases and the biggest profit since $38 billion in the third quarter of 2006, before the housing bubble burst [...]

RBC Capital Markets analyst Gerard Cassidy said the profits were remarkably high — at a level that, if maintained for a year, would exceed the record for annual earnings, set in 2006.

Analysts had worried over recent reports that showed bank profits had grown largely because banks were merely cleaning up bad loans, and as a result needed fewer reserves against losses. Now the industry’s top line is growing as well, with the home-refinancing boom producing large gains on the sale of mortgages to government-supported financial giants Fannie Mae and Freddie Mac.

The refi boom is facilitated by low mortgage rates from the Fed and the decision from Fannie and Freddie to refi underwater homes. In other words, massive government support delivers these profits to the banks.

And despite all that support, banks cannot sustain their own weight:

Citigroup announced on Wednesday that it would cut 11,000 jobs, reducing its work force by roughly 4 percent in an effort to cut costs.

The bank said it would take a pretax charge of roughly $1 billion for the cuts.

Which is a fancy way of saying that they will take a tax benefit from the job cuts. The stock price shot up as a result, which shows that investors understand well how government benefits can keep any firm profitable.

US banks continue to not hold enough capital to comply with international standards. Their risk management has shown to be spotty at best, with the most celebrated example being JPMorgan Chase’s Fail Whale trades. They continue to resist regulatory efforts to rein in practices like proprietary trading. And their size, and the implicit bailout that goes with it, continues seemingly without end.

You can rightly call banks wards of the state at this point. Without the implicit and explicit benefits afforded them by all levels of government, they may not be able to sustain themselves. And they certainly are not fulfilling their role of allocating capital to those who want to make investments.

These are among the reasons why we have a growing movement to cut banks down to size, with even Fed Governor Daniel Tarullo on board.

In a speech at the Brookings Institution on Tuesday, Tarullo, the head of bank supervision at the Fed, stopped short of calling for permanently abolishing government backstops for banks. But he laid out policies to contain the problem, some of which would require fresh legislation.

“The policy aim has got to be to confine the problemsubstantially more than it was in the years running up to the crisis,” he said. “That seems to inexorably call for a set of complementary policy measures” to Dodd-Frank [...]

Tarullo also reiterated an idea that he has been pitching for months: restricting the expansion of big banks by limiting their non-deposit liabilities — funding that comes from sources other than consumer deposits in savings or other accounts. The plan targets behemoths such as ­JPMorgan Chase and Citigroup who rely heavily on such funds, Tarullo said, which makes banks more vulnerable in crises.

Tarullo has yet to offer details on the size of the cap but is calling for more analysis of the potential impact of the proposal.

Thomas Hoenig of the FDIC is another proponent.

I don’t know if we’ll get to this point, but people should consider that these profits are a SYMPTOM of the runaway bank size that still harms and threatens our economy and the public treasury, not an example of why such concerns are overblown.

Photo by dvpfagan under Creative Commons license.

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