Now that Bank of America has announced a $4.2 billion profit for the first quarter of 2009, we would appear to have good news from five of the biggest names in banking and finance. Last week Goldman Sachs reported profits of $1.81 billion; Bank of America, $4.2 billion; J.P. Morgan, $2.4 billion; and Wells Fargo, $3 billion.
Last week, stock prices surged on the news. But today, as of about 2:30 p.m. EDT, the Dow Jones industrial average was down 3.3 percent, or 267 points, based largely on fears, surmised the Wall Street Journal, that the health of the financial sector is none too good.
This must be one of those rare cases where the insta-wisdom of the markets has actually gotten something right. Because the closer you look at nearly all the recently reported numbers, the worse they get.
Never mind the absurdity in which Goldman Sachs conveniently erased December, a month in which the company lost billions of dollars, from its accounting books by including it neither in the first quarter of this year nor the last quarter of 2008. (Goldman Sachs said its switch in status to a "bank holding" company required a new fiscal calendar.) Never mind that Citigroup somehow managed the magic trick of turning the fact that its debt was losing value into an accounting profit. Put aside, if you can, the reality that none of these banks would be reporting profits of any kind if the government and the Federal Reserve hadn't gone to extreme lengths to ease credit markets, boost the housing sector through lower mortgage interest rates, and weaken accounting rules.
The real worries come when you look at what is happening in the world of the consumer. Credit card losses are surging, loans are going delinquent, and everyone is sitting on what little cash they have. For banks that have a large retail component, that's a problem that is only going to get worse.
Earnings in retail banking declined by half from a year earlier, to about $500 million. Cards swung to a $1.8 billion loss from a $867 million profit, and the global banking segment with commercial banking and some advisory businesses fell to $175 million from $1 billion. The mortgage segment recovered somewhat, but still posted a $500 million loss.
Does that sound like a healthy bank to you? Even more worrisome: The surge in credit card losses can be directly tied to growing unemployment. Unemployment, barring a miraculous turnaround, will likely continue to rise for at least a year and possibly longer. That means, going forward, continued extreme negative pressure on those financial institutions that have large credit card portfolios -- such as Bank of America, Citigroup and J. P. Morgan.
The closer you look at these numbers, the more inevitable it seems that any honestly administered stress test (the results of which are due to be released two weeks from today) will show that Citigroup and Bank of America are going to need a lot more capital to get through the next year, current "profits" notwithstanding. Of course, we knew that three months ago. Now, however, we really are approaching a day of reckoning, at least by the administration's own timetable. If we haven't arrived at the endgame, we are at least at the beginning of the endgame.