By Mark Huffman
ConsumerAffairs.com
January 18, 2010
As major banks prepare to report fourth-quarter earnings, the public is about to learn that the last few months have been pretty good for the industry, including those institutions that were a step away from bankruptcy a year ago.
In a high-profile confrontation, the Obama Administration is pushing for a tax on banks, to ensure that the billions of taxpayer money they received is paid back in full. Not surprisingly, banks are resisting this idea.
While that drama is playing out, the Washington-based policy group Demos is releasing a report, purporting to show that banks are once again involved in the kind of heavily leveraged, high-risk practices that produced the financial meltdown. The difference now, of course, is they are using taxpayer money.
In "Bigger Banks, Riskier Banks: The Post-Bailout Continuation of a Pre-Bailout Trend," co-authors Nomi Prins and James Lardner look at the recent record of the top four commercial banks -- Bank of America, JPMorgan Chase, Citigroup, and Wells Fargo--as well as the two giants of investment banking, Goldman Sachs and Morgan Stanley.
Profits have rebounded at all six institutions, which were among the biggest recipients of federal bailout money. But as the Demos report notes, it is higher trading revenues, not lending and other ordinary banking activity, that account for the improvement in one case after another.
JPMorgan Chase, for example, last week announced 2009 net profits of $11.7 billion, more than twice the 2008 figure of $5.6 billion. At the same time, trading activity surged, accounting for 15.9 percent of the companys total revenues, which is an even higher proportion than in 2006 or 2007. In 2008, Chases trading division racked up a loss of $7 billion.
The other big banks will announce their 2009 profits this week. Extrapolating from data for the first three quarters, the Demos report finds the same pattern of rebounding profits based on high levels of trading with borrowed money, including low-cost government-subsidized capital. Perhaps the biggest difference between now and the pre-bailout period is that "more of the capital for today's high levels of trading and securities packaging comes from the taxpayers in the first place," the authors write.
Because banks are leveraging near zero percent interest rates, the authors write that its more profitable to trade with the money than lend it out. "It should come as no surprise that despite low interest rates and surging bank profits, many deserving businesses cannot get credit, while foreclosures continue to increase as homeowners struggle to refinance unaffordable mortgages," they write.
The report links the bank's increased reliance on trading to increased systemic risk. At JPMorgan Chase, a widely used risk metric, "value-at-risk" or VaR, stood at a record high of $248 million (as a daily average) for 2009. That's a 23 percent increase over 2008.
