Underwater: Profits and pay are sky-high, even as bad loans are sinking the megabanks

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from Dollars & Sense:



Underwater
Profits and pay are sky-high, even as bad loans are sinking the megabanks.

By Rob Larson


Since the catastrophic bank collapses of 2008 and the government rescue of the finance industry, Wall Street has staged a dramatic comeback. Since the bailout, profits are up, capital reserves are up, stock prices are up, government direct aid has been paid back, and executive compensation is exploding. But a closer look shows bank stability is just skin-deep, and dense accounting rules hide a powder keg of bad debt and mounting funding issues. While the recent paper-thin re-regulation of finance was a major political victory, the banks’ core business is headed downhill and even worse trouble seems to lie ahead.

All of the big four U.S. megabanks—Bank of America, Citigroup, Chase, and Wells Fargo—reported either decreases or very modest increases in their massive profitability during 2010. But this surprisingly weak performance would have been even more disappointing without a pair of accounting maneuvers. One was a bookkeeping measure allowing banks to book projected profit from buying back their debt when their bonds become cheaper. But the banks rarely buy back their debt, so this is essentially a paper gain. The other penstroke that boosted profit was consumption of money set aside to protect against losses on loans—as banks have grown more outwardly confident about the economic recovery, they have lowered their stated expectations of bad loans and designated some of their capital cushions as profit.

But these shallow techniques for elevating profit weren’t enough to compensate for the decline in banks’ core business—interest income, the money collected from loans minus that paid out to depositors. That income has consistently dropped this year, mainly due to falling loan volume. Banks are making fewer loans to consumers and businesses, citing a “lack of demand,” which obscures the quite favorable credit rating now required to get a loan. The lower supply of qualified applicants as job losses persist, combined with locking out applicants with spottier credit history and a general consumer preference to reduce total debt, have all caused bank loan books to continue to shrink in the feeble recovery. .............(more)

The complete piece is at: http://www.dollarsandsense.org/archives/2010/1110larson.html