Banks Still Going Bust?


Some creative accounting, a Congress reluctant to offer any more help and the “stress test results” may squash a big comeback by the banking industry. The stock market is bouncing up and down as investors seem jittery about the banking industry, despite several major banks reporting first-quarter profits. Wells Fargo, Inc., Citigroup and Bank of America all reported better than expected earnings for the first part of the year.

Those booming bottom lines from banks are being questioned though. The New York Times financial columnist Paul Krugman warned Americans to stay skeptical as banks maneuvered their numbers. “The biggest positive news in recent days has come from banks, which have been announcing surprisingly good earnings. But some of those earnings reports look a little…funny.” For example, Krugman noted that Goldman Sachs changed its definition of “quarter.”

Treasury Secretary Timothy Geithner revealed recently that of the $ 700 billion in government bailout money dedicated to rescuing the U.S. financial markets, only $ 109.6 billion remains. While the Treasury Department said they expect the fund to receive about $ 25 billion in the next year as companies repay their loans, Congress seemed a little confused on the return taxpayers were getting on this massive investment. The numbers breakdown as follows, according to the Associated Press:

$ 355.4 billion – committed under the Bush administration to help bolster AIG, Citigroup, Bank of America, GM, and Chrysler among other companies.
$ 30 billion – additional funds given to AIG under the Obama administration.
$ 5 billion – additional funds to automakers under the Obama administration.
$ 200 billion – disbursed to more than $ 500 banks.

With all that money flowing to the banks, the Federal Reserve’s “stress test” results of 19 major banks should be stellar, right? The results will not be publicly revealed until May 4, but early indications don’t look promising.

According to the AP, “Federal Reserve officials told reporters Friday that all 19 banks that underwent stress tests will be required to keep an extra buffer of capital reserves beyond what is required now in case losses continue to mount. That would mean some banks will likely have to raise additional cash.”

One way the government proposes that banks could raise more capital would be for the Fed to convert its stake in the banks from preferred shares to common shares, which have voting rights. Many analysts say this smacks of the dreaded nationalizing of banks. However, Congress seems very reluctant to loosen the purse strings any further for the financial industry, especially amid the American public’s anger over bonuses and other bank excesses.

The next couple of weeks will be critical for the banking industry as they scramble to improve scores ahead of the Fed’s public announcement of the stress tests results. For all the bailout money banks have received credit remains tight for American consumers and businesses and lending is still way down.

In other financial news, despite better than expected numbers for consumer confidence in April, the economy is shrinking at an alarming rate. According to a recent AP report, the economy shrank 6.1 percent in the first quarter of this year as companies continue to cut spending and shed workers.