The Banks Are Back… or Are They?

Their profits are up. Their write-downs are lower. The government is riding shotgun for them. And the worst is over.

The banks are back, right?

Goldman Sachs, JP Morgan, Bank of America, Wells Fargo, and even Citigroup all reported profits for the first quarter of 2009. But a closer look under the hood reveals some “creative accounting”…

  • Bank of America arbitrarily increased the value of its Merrill Lynch assets.
  • Goldman Sachs bunched much of its losses into the month of December – a month it skipped reporting on this year.
  • JP Morgan’s bonds fell in price. And that perversely allowed the bank to increase its bottom line.

Most of the banks did extremely well in fixed-income, currency, and commodities trading this past quarter. So is this the new bank model? Making boatloads of money from Forex and bonds?

Not likely. It looks more like a one-time bonanza to me.

The Fed and European central banks were broadcasting their quantitative easing efforts. It’s not hard to make money when the government is telling you which way rates are going. But now that the run-up to quantitative easing is over, making those oversized profits will get a lot harder. So where else will the banks be getting their money?

A bank’s loans are only good assets if they get paid back. And the brutal recession we’re having is forcing more and more loans into default. When their loans go into default, banks go from earning money to spending money. Each foreclosure, for example, costs a bank about $50,000.

The banks still have some tough sledding ahead.

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Andrew Gordon

Andrew Gordon is a former editorial contributor for Early To Rise Investor’s Edition. He has 20 years of experience working in infrastructure and environmental projects around the world. When he wasn't traveling, he taught marketing and finance courses at the state university of Maryland. Mr. Gordon has authored several books for McGraw Hill and other publishing companies on energy markets, global countertrade practices and the hot growth sectors of China and Russia. He is also a top-rated speaker at financial conferences.