Why banks still teeter, after $232 billion in aid
Losses on mortgage debt, followed by recession woes such as corporate bankruptcies and rising defaults on credit cards, delivered a one-two punch.
(Page 2 of 2)
Bank executives say credit-card losses are rising and in some banks now represent 5 to 7 percent of their portfolios.Skip to next paragraph
Subscribe Today to the Monitor
"Credit-card losses are approaching or above historical levels," says Mr. Thomas.
In the past, banks were able to take losses and keep functioning without government aid. But bankers, normally conservative, took such great risk in the mortgage markets that most banks do not have sufficient reserves going into the recession, says Mr. Thomas. "The banks are now hobbled."
Some analysts are concerned about the economic effect of continued bad news, referring to it as a negative feedback loop.
"As more people stop paying on their credit cards, it puts more bank assets in jeopardy, which results in less lending, which in turn contributes to the ongoing financial crisis," says Martin Baily, a senior fellow at the Brookings Institution in Washington.
Banks' need for new capital was apparent again last week, when the Treasury said it would invest $20 billion in Bank of America – on the same day the company reported a $1.8 billion loss for the fourth quarter of 2008. Some of the new funds will help the bank swallow Merrill Lynch & Co., which reported a $15 billion fourth-quarter loss and was acquired by BofA Jan. 1.
At the same time, the government is trying to shore up Citigroup's finances. On Friday, the Treasury said it will guarantee $301 billion in Citigroup assets, supplying the missing number in an agreement first announced in November. Citi reported a loss of $8.2 billion in the fourth quarter, and its stock continued to fall.
"What is important is that it shifts the results of historic bad decisions on the part of Citi risk management onto us taxpayers," says Thomas of Gradient.
The scramble to plow money into Citi reflects the government's position that such large banks cannot be allowed to fail. "The repercussions would be too great," says Mr. Baily. "But they are trying to get rid of parts of the company that are potentially profitable."
Citi said last week it would move its Smith Barney brokerage business into a joint venture with Morgan Stanley. Executives claim the move would net the bank $5.8 billion. By year's end, Citibank will have shed about 30 percent of its assets, analysts say.
"It looks like the future for the bank is diluted ownership, elimination of the dividend, and a lengthy restructuring of the company to only a fraction of its old self," says Fred Dickson, chief investment strategist at D.A. Davidson & Co. in Lake Oswego, Ore. "We will have to see how the government manages the process."
Mr. Bethune says the US banking sector is in a process of further consolidation. Today, the 10 biggest banks have 60 percent to 70 percent of the nation's financial assets, he says. "In the future they will have perhaps 80 percent of the assets," he says. "There will be increased concentration, less competition, and more fees."