Thursday, December 6, 2012

Bank Profits Illusory

"Banks Profits Up 6.6%" by Alan Zibel Dec 5, 2012 p. C3 The Wall Street Journal

[Excerpted] "Total profit of $37.6 billion, was up 6.6% or $2.3 billion, from the same quarter a year earlier....

...Banks are able to book gains by selling off refinanced loans to federally controlled mortgage giants Fannie Mae and Freddie Mac...

...In recent quarters, the industry has drawn most of its earnings improvements from small provisions to cover bad loans, and officials had flagged the trend as a concern. But in the third quarter, provisions for loan losses fell by 20.6%, to $14.8 billion, from a year earlier. [end excerpt]

Majia here: Let us look carefully at what this article is arguing.

It is stating that there are 2 main mechanism for growing profits in American banks:

1. Sales of re-financed loans to quasi-government agencies, Fannie and Freddie

2. Declining reserves (a.k.a. "provisions) for for loan losses

Let us think about this for a minute. Neither of these profit mechanisms is grounded in authentic growth.

There is no "free" market for the bulk of re-financed mortgages and that is why the banks are selling them to Fannie and Freddie, which are government guaranteed.

Second, the latter profit making mechanism of reducing reserves is, in fact, alarming because it is occurring in a context of declining household income and growing student loan defaults.

Nov 28, 2012
It was announced last summer that total student loan debt, at $830 billion, now exceeds total US credit card debt, which is itself bloated to the bubble level of $827 billion. And student loan debt is growing at the rate of $90 .
Nov 07, 2012
Household income for people in their peak earning years — between ages 45 and 54 — plunged $7,700 to $64,349 from 2000 through 2008, after adjusting for inflation. People in their 20s and 30s suffered similar drops.
Oct 10, 2011
"Between June 2009, when the recession officially ended, and June 2011, inflation-adjusted median household income fell 6.7 percent, to $49,909, according to a study by two former Census Bureau officials. During the ...
Bank profits are in large part illusory, according to the explanatory details provided in this article.

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