Thursday, April 23, 2009

Return of good times for US banks?

Several top US banks including Citigroup and Goldman Sachs have reported impressive results in the first quarter. Some have interpreted this as a sign that the banks are finding their way back to good health and they also see this as good news for the world economy.

Sorry, it ain't all that great. Even if banks start making profits, it only reduces accumulated losses - or helps banks write off bad assets. it does not help increase the quantity of loans- and more credit is what is required to get the wheels of the economy going. The balance sheets of US banks will shrink this way until banks are restored to health. This slow process of recovery helps shareholders who would otherwise be wiped out at one stroke if the US government were to nationalise them- which is why the government, run by ex-bankers and investment bankers, doesn't want to take that step.

Moreover, US bank profits have been helped by regulatory forbearance in several ways as an article in the FT points out:

First was the decision by the Federal Accounting Standards Board on April 2 to modify what many bankers considered the FASB’s onerous mark-to-market rules forc­ing securities firms to write down the value of their assets as they lost value in the in­creasingly illiquid market. (Seems like a reasonable idea to value assets at what they are really worth, no?) The FASB had been reviewing this change and received much commentary from the financial community “that asserted that fair value is not as relevant when financial markets are inactive or ­distressed”.

.....The Federal Reserve has also been listening carefully to the banks’ pleas. It has lowered the cost of money it charges banks – and since all the big Wall Street securities firms are either gone or have become banks, this means virtually everyone – to close to zero.

Then there is the sleight of hand, at least in the case of Goldman Sachs, which, when it converted from a securities firm to a bank holding company last autumn, changed its fiscal year-end to December 31 from November 30. Its first-quarter numbers, for the three months ended March 31 2009, did not include its horrific December results – into which Goldman threw everything but the kitchen sink – of a loss of more than $1bn. During the past seven months – including December (there was Christmas, right?) – Goldman in fact lost $1.5bn.

So much for the good news from the US.


K.R.Srivarahan said...

It is a pity that Accounting Standards Boards like FASB choose to amend the rules, albeit temporarily, preferring expediency to purity of standards. "Standards" cease to be standards when they are so easily amendable.Practices are supposed to follow standards and not vice versa.The need for strict implementation of standards during tough times is greater and not less.
Dilution of AS 11 by Indian Ministry of Corporate Affairs is also deplorable.

K.R.Srivarahan said...

You had earlier referred to the report of FSA's Chairman,Adair Turner. Here is a report on American banks scooped by a different Turner.The report's contents await confirmation from the Treasury Department.If the blog report is true, i.e. if 16 of America's top 19 banks are "technically insolvent", isn't economic apocalypse round the corner?