How are US Banks Doing These Days?

Sometimes a few charts say more than a thousand words …

(ALLL = Allowance For Loan and Lease Losses)

net charge offs

All these charts ultimately tell us :

– Banks continue to face an ocean of non performing loans
– But these non-performing loans are outpacing their ability to up the allowance for future losses
– Net loan charge offs are way past record highs and continue to shoot higher
– Return on bank assets and equity is approaching negative territory – still way too many resources are tied up in the banking sector

There is no recovery, not in banking anyway. Why? Because they made too many loans and are still facing the bitter reality that many of those will never be paid back. But why won’t they recover as a result of the recent bailout and stimulus efforts? Because those aimed at getting banks to loan out more money … which is the cause, not the cure of their predicament.

There are many more bank failures, write offs, charge offs, and foreclosures ahead of us before we can truly speak of a recovery. Especially if we keep postponing and dragging this process out from month to month.

It’s the policies from The Great Depression all over again.

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New Bank Bonus Releases – Heads: Bankers Win, Tails : Taxpayers Lose

And more unsurprising news on the TARP front. Cuomo releases ugly details on bank bonuses:

NY Attorney General Andrew Cuomo released his report on bonuses at the TARP Top 9.  At these firms alone, over 800 people made north of $3 million in 2008.  That’s a lot of scharole.  See Appendix B for the bonus breakdown at each bank.

The key info is in one particular table, however:

(Click to enlarge in new window)


The columns to the right list the number of employees that received bonuses in excess of $3 mil/$2 mil/ $1 mil.

Banks that are still sitting on their TARP money (Citi, BofA, Wells among them) have no business paying out big bonuses before paying back the government. For that matter, neither do the others, who all continue to benefit from FDIC guarantees on debt and Fed lending facilities through which they’ve traded toxic loans in exchange for perfectly liquid Treasuries. They can use the Treasuries for repo collateral, get cash and then put that on deposit at the Fed where they now get paid interest on their excess reserves. It’s a great scam. One that feeds lots of cash into the 2009 bonus pool.

And GazetteOnline writes:

Citigroup Inc., one of the biggest recipients of government bailout money, gave employees $5.33 billion in bonuses for 2008, New York’s attorney general said Thursday in a report detailing the payouts by nine big banks.

The report from Attorney General Andrew Cuomo’s office focused on 2008 bonuses paid to the initial nine banks that received loans under the government’s Troubled Asset Relief Program last fall. Cuomo has joined other government officials in criticizing the banks for paying out big bonuses while accepting taxpayer money.

Comparisons to historical payouts weren’t available, as the banks are not required to disclose the information publicly. They provided 2008 details to Cuomo’s office under subpoena.

Cuomo’s office found that the companies, which also included Bank of America Corp., Merrill Lynch & Co., JPMorgan Chase & Co. and Goldman Sachs Group Inc., awarded nearly 4,800 million-dollar-plus bonuses, with much of the money going to Wall Street investment bankers.

Citigroup, which is now one-third owned by the government as a result of the bailout, gave 738 of its employees bonuses of at least $1 million, even after it lost $18.7 billion during the year, Cuomo’s office said. The bank’s top four recipients received a combined $43.7 million.

The New York-based bank received $45 billion in government money and guarantees to protect it against hundreds of billions of dollars on potential losses from risky investments.

“There is no clear rhyme or reason to the way banks compensate and reward their employees,” Cuomo said in the report, noting banks have not in recent years actually tied pay to performance as they claim when describing their compensation programs. Cuomo added that when banks’ performance deteriorated significantly, “they were bailed out by taxpayers and their employees were still paid well.”

Bank of America, which also received $45 billion in TARP money, paid $3.3 billion in bonuses, with 172 employees receiving at least $1 million and the top four recipients receiving a combined $64 million. Merrill Lynch, which Charlotte, N.C.-based Bank of America acquired during the credit crisis, paid out $3.6 billion, including a combined $121 million to four top employees.

Bank of America earned $2.56 billion in 2008, while Merrill lost $30.48 billion. Cuomo’s office said Merrill Lynch doled out 696 bonuses of at least $1 million for 2008.

Bank of America has been sharply criticized for its acquisition of Merrill Lynch because of mounting losses at the Wall Street bank and the size of bonuses Merrill paid its employees. Of the $45 billion in bailout funds Bank of America received, $20 billion was to support the acquisition of Merrill. Neither Bank of America nor Citigroup have repaid their TARP loans.

A Bank of America spokesman declined to comment on the report. A spokesman for Citigroup did not return repeated calls for comment.

The truth is: The public has no business discussing and quarreling about how much banks decide to pay their employees in bonuses. Legislators had the choice to unconditionally reject the TARP bailout ripoff. Many tried to talks sense into people. They didn’t listen. They rewarded companies whose financial irresponsibility led them to collapse, so they could continue their adventures in screw-up land. What did they expect to see happen? Now these clowns are running around, trying to find scapegoats for their own incompetence and cluelessness. What a circus!

Paola Sapienza and Luigi Zingales appropriately call for the government to Stop Subsidizing the Street:

The word for “crisis” in Chinese, weiji, is written with two characters: one (wei) means danger; the other, ji, means opportunity. That’s because every crisis challenges the status quo and in so doing creates the opportunity for something new to emerge. “This process of Creative Destruction,” wrote economist Joseph Schumpeter, “is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.”

We have experienced the destruction wrought by the financial crisis. Now it’s time to focus on the opportunities it brings. The first place to look is the site of the greatest destruction: the banking sector. While finance will remain a pillar of a well-functioning economy, it’s unlikely that banking will survive for long in its current form. The current banking model is broken. Citigroup has been on the verge of failing in three of the last four downturns: This is hardly a viable business model.

Even more important is that Americans are rapidly losing trust in their banks. A survey we conducted at the end of March showed that only 29% of Americans trusted banks, down from 34% three months earlier and 42% a year ago. Twenty percent of respondents felt that a bank had cheated or misled them in the previous 12 months, while 10% had withdrawn their FDIC-insured deposits and squirreled away the cash. The word “credit,” speaking of telling etymologies, comes from the Latin credere, which means “to trust.” Trust is essential in banking, and it’s unlikely that banks can restore it. It’s always difficult to regain trust; it’s easier to start anew.

Luckily, starting anew is exactly what’s happening in the banking sector, with the launch of several start-ups with innovative ideas. They range from new ways to insure mortgages to new models of lending to reliable consumers by bypassing the current banking system. Many others, such as Lending Club and Prosper, are popping up on the Internet, letting investors, rather than credit officers, decide who is creditworthy. It’s too early to tell if these attempts will succeed, but it’s vital that they occur. Through trial and error, a new world of banking will rise from the ashes of the old one.

Should the government subsidize these efforts? In a New York Times column this spring, Tom Friedman said yes, suggesting that it should dedicate a fraction of the Troubled Asset Relief Program (TARP) money to promote innovation. Fortunately, several venture capitalists have rejected the idea online, and with good reason: The government’s record as a venture capitalist is rather poor.

Nevertheless, the government can foster the new and innovative in a crucial way: by ceasing to subsidize the banking dinosaurs. The evidence shows that subsidies to failing companies not only waste resources in keeping obsolete and inefficient firms alive, but also delay the entry of new and more efficient organizational models.

TARP was sold as a way to keep credit flowing, but it could wind up delaying the success of new ventures that could help revive credit in the economy. For finance to begin allocating resources efficiently again, the government must stop propping up Wall Street.

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US Confidence in Banks Reaches Record Low

Please consider the latest Gallup Poll on Confidence:

… confidence in banks fell by 10 points, from 32% in June 2008 to a record-low 22% today. The previous low point for banks was 30% in October 1991.


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Confidence in US Banks at New Low

Amid stress tests and seemingly positive “news” Americans’ Confidence in Banks Hits New Low:

As the Treasury and banking regulators prepare to provide a description of their banking “stress” tests on Friday and the results on May 4, the percentage of Americans saying they have a “great deal” or “quite a lot” of confidence in U.S. banks has fallen to 18% — down 14 percentage points from a June 2008 Gallup Poll and 23 points from a June 2007 poll.

I think whoever proclaims that we might have hit some magic bottom or that we are out of the woods is utterly mistaken. We have certainly seen an all to familiar bear market rally, and banks have made their earnings look appealing. But fundamentals haven’t changed. Consumer credit is just beginning to unravel. Commercial real estate is about to implode:

Since late 2007, a total of 47 banks and savings institutions have failed, of which a dozen or so had unusually high commercial-mortgage exposure. Foresight Analytics in Oakland, Calif., estimates the U.S. banking sector could suffer as much as $250 billion in commercial real-estate losses in this downturn. The research firm projects that more than 700 banks could fail as a result of their exposure to commercial real estate.

Bank failures will likely be rampant. So long as the business cycle correction is being slowed down, the economy is likely to continue down the path it has been on for the past 2 years.

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Lending Can’t be Forced

Moneymorning writes As Big Banks are Criticized for not Lending, Small Banks Find They Can’t Lend:

While congressional leaders this week excoriated the leaders of banks that have received billions of dollars in government bailout money for not doing enough to end the credit crisis, it may actually be consumer fear of borrowing that’s blunting banks’ efforts to lend.

Chief executives of eight big U.S. banks that have received the taxpayer-provided rescue money were in Washington this week to testify before Congress told U.S. lawmakers that their institutions have lent out more than $400 billion. Skeptical congressional leaders excoriated the executives for not doing enough to end the credit freeze that’s blunting consumer confidence and threatening to plunge the U.S. economy into an even deeper recession.

But the U.S. consumer may now be the real culprit. Banks want to make loans. The problem is that fear-frozen consumers just aren’t biting, said Curtis Hage, CEO of closely held Home Federal Bank of Sioux Falls, S.D., which received $25 million worth of federal bailout money via the Troubled Assets Relief Program.

If there was a greater demand out there for loans, we’d be out there after them like a dog after a bone,” said Hage.

The upshot: Big banks are under the congressional microscope, even though the appetite for loans among many typical American consumers seems to have dried up.  Small bankers around the country are finding that, for now, many customers are sitting tight.

Congressional leaders didn’t want to hear that as they grilled the CEOs of big U.S. banks earlier this week.

“There is a great deal of anger about the financial institutions here,” House Financial Services Committee Chairman Barney Frank, D-Mass, told the CEOs. “There is anger about us, and there is anger about the executive branch. If you want to give the money back, we’ll take it.”

TARP was designed to thaw frozen credit markets, then-Treasury Secretary Henry Paulson told Congress on Nov. 24. But lending nationwide actually slowed after the Treasury Department began giving 389 banks $236 billion in TARP money on Oct. 28.

Outstanding loans and credits at commercial banks fell to $7.057 trillion in the week ending Jan. 28 from $7.266 trillion in October, according to the Federal Reserve.
The CEO’s of the big banks that received the first allocation of $125 billion of TARP funds were put on the hot seat yesterday (Thursday) as Congress demanded to know exactly what they had done with the government money, MarketWatch reported.

But they defended their actions, saying they had actually increased lending, largely because of funds they had received from the bailout program. In fact, two bank chiefs said they lent out even more money than they received from TARP.

We are actively putting our capital to work,” said Goldman Sachs (GS) CEO Lloyd C. Blankfein.

  • Wells Fargo & Co. (WFC) CEO John G. Stumpf said that his bank made $72 billion in new loans in the fourth quarter, adding that the loans were almost three times what the bank received in bailout funds.
  • Bank of America Corp. (BAC) CEO Kenneth D. Lewis said the bank lent roughly $127 billion in the fourth quarter. More than half that money was doled out to commercial real estate and businesses.
  • Citigroup Inc. (C) CEO Vikram S. Pandit said that the bank provided more than $75 billion in new loans to consumers and businesses in the fourth quarter.

But some question whether enough lending is taking place. Based on a 1 to 10 lending ratio, critics argue that these banks should be lending $1.3 trillion based on the $125 billion allocated to them.

House members reiterated their concerns about how banks are using the government money and raised questions about whether banks have been using the capital injections for making acquisitions instead of lending.

In fact, Money Morning was one of the first news organizations to really examine how TARP money was being misdirected, and wasn’t being deployed as originally intended.  As our ongoing investigation has demonstrated, billions in U.S. bank rescue funds are financing buyouts worldwide – instead of lending at home. Some of those buyouts deals are being done in markets as far away as China, even as banks outright refused to discuss the matter.

For its part, the Obama administration will mandate that any TARP funds it releases to banks will be directed specifically for lending, Treasury Secretary Timothy Geithner said on Tuesday  (Feb. 10).

But by essentially targeting Wall Street banks, Congress may be missing out on what’s really happening – or not happening – out on Main Street.

C.R. “Rusty” Cloutier of MidSouth Bank in Lafayette, La., wants to do his part for the economy by lending locally for cars, homes, and small businesses – if only he could get his customers to cooperate.

After his bank received a $20 million cash infusion from TARP on Jan. 9 he went on the road to 14 “town hall” meetings, hoping to entice borrowing by consumers in its business market.

What we want to do is make people aware we have $250 million to lend,” Cloutier said.  But, at one meeting, the 20 or so customers in the audience were outnumbered by bank employees handing out cookies and bottled water. Not one person asked for an application.

While he has attracted a few fresh borrowers, people are “very, very nervous” about taking on significant new debt, the 61-year-old banker said. “Credit hasn’t tightened, but the ability to find creditworthy borrowers has tightened.”

Some MidSouth officials wonder if the bank did the right thing in accepting TARP assistance, said Will G. Charbonnet Sr., MidSouth’s chairman.

The $20 million was in exchange for 20,000 preferred MidSouth shares, which the Treasury Department bought for $1,000 each, according to the bank. MidSouth pays a 5% annual dividend. In addition, the Treasury received 208,768 warrants for common shares, according to Bloomberg.

I wrote about this a while ago in Where Has All the Money Gone. A few more people seem to be understanding it now. Count out Congress, whose members are ranting and shouting day in and day out about the lack of credit, tightness of credit, and stingy banks.

People are sick and tired of borrowing, spending, and debt. They want to save up money and/or consolidate debt which they have failed to do for the longest time.

Most of these banks are now sitting on liabilities that pay out a fixed 5% annually without being able to pass the money on at a premium. Expect them to either buy back those shares (if they can) or at least not to accept any more government money from hereon out.

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