By John W. Schoen, Senior Producer
If even a banker can't make money, times are really tough.
The latest round of quarterly bank earnings is bringing into sharper focus the breadth and depth of the economy's distress.
Interest rates are lower than they've been in decades.?Ordinarily, cheap money is a banker's dream. But businesses and consumers just don't want to borrow ? at least not until they see some evidence that the economy is improving.
"It's hard not to be cautious," JP Morgan Chase CEO Jamie Dimon told investors and reporters on a conference call last week. "Right now, nobody knows what is going to happen tomorrow."
That will likely be the main theme of hundreds more corporate?conference?calls in coming weeks, as business leaders try to give investors their best guidance about business prospects for the next few months. Most will likely cite ongoing uncertainty over slowing demand, flagging consumer confidence and the fresh whiff of inflation in the air. With the presidential campaign under way, many will also add to the list the confusion surrounding tax policies, federal budget cuts, health care costs and new regulations.
More recently, another major threat has hit the banking industry's radar screen: the escalating turmoil in Europe.
"The fact is we don't know what the rest of the world is going to do," said Dimon.
After two years of talking, European political and financial leaders are running out of time to head off a Greek debt collapse. The hope is that by orchestrating an "orderly default," bankers can head off another global credit crisis like the Panic of 2008 that followed the collapse of Lehman Bros. But despite repeated efforts to hammer out a workable solution, Europe's leaders remain hamstrung by the conflicting interests of the 17 eurozone countries frozen in political gridlock.
"The situation needs to get dramatically worse before they really get focused on what they need to do," MIT professor and former IMF chief economist Simon Johnson told CNBC. "And we're not there yet."
Investors have already bid down the market price of Greek debt as it becomes increasingly clear the country simply can't pay it back. Now, it's the banks' turn.
This weekend, the European Union will consider yet another plan, this one forcing bankers to take a bigger "haircut" -- of 50 percent -- on their Greek debt holdings. But Johnson said the plan may not go far enough.
"For sure the banks are going to be absorbing extra losses," he said. "But I'm not sure 50 percent is enough. When you look at the numbers carefully, it looks like you'll need 60, 70, some people would say 80 percent to really get Greece on a medium-term sustainable debt path."
Bankers routinely write down bad debt, and many have already set aside some reserves to cover the losses. U.S. banks, in particular, are seen as reasonably well insulated from the direct hit of a Greek default. The wider fear is that a disorderly default could spark another global credit crisis. ?And even if the default is "orderly," bank profits will be harder to come by if the ongoing slowdown in Europe spreads to the global economy.
"The eurozone is already heading for recession, and if its public debt and banking crisis is not contained, the rest of the developed world may follow suit," economists at Capital Economics wrote in research report issued Tuesday.
Bucking the trend
Some smaller, regional U.S. bankers are having better luck than their "too big to fail" counterparts. On Wednesday, US Bancorp and PNC Financial Services reported better-than-expected third-quarter profits thanks to belt-tightening and the growth of commercial loans to smaller businesses.
Smaller businesses rely more heavily on conventional lending because they have a harder time getting funding by selling bonds on Wall Street. Regional banks have also fared better because they are holding fewer bad mortgages and largely sat out the boom in mortgage-backed bonds that drove the housing bubble.
Morgan Stanley bucked the trends facing its big bank rivals, posting a bigger profit Wednesday than analysts had expected. But some $3.4 billion of its revenues resulted from the same accounting footnote that helped Bank of America offset its operating losses in the latest quarter. As the value of the debt on these banks' books fell, accounting rules require them to record a gain on their financial statements.
Those footnotes didn't reverse the harsh impact on consumers as unemployment remains stuck at recession levels.
Profits from consumer banking were hit hard in the third quarter as American households coped with high unemployment and falling home prices by cutting spending and shunning new loans. Though households are slowly paying down debt, wages have stalled, leaving them with little or no money to save or invest.
Consumers are just as leery as big businesses to take on more debt. Bank of America, one of the nation's largest credit card issuers, said revenue from that division dropped 16 percent in the latest quarter
With no signs of recovery in the housing market, banks are writing fewer mortgages. They're also struggling to stem the losses from the mortgages already on their books. Falling housing prices have also added to the number of homeowners who find themselves "underwater" on their loans. That puts them at greater risk of joining the huge backlog of homes in the foreclosure pipeline. As those houses are sold at distressed prices, bankers face the prospect of further losses.
Bankers with heavy mortgage portfolios also face tens of billions of dollars in legal claims from investors who bought bonds backed by mortgages that failed. Bank of America, for example, said that as of the end of the quarter it had $11.7 billion worth of such claims pending from investors and others who are demanding the bank buy back bad mortgages.
They also face a host of other legal claims for doctoring documents and cutting corners in the foreclosure process, including "robo-signing" paperwork without properly verifying it. The industry's largest players are in talks with state attorney's general over a settlement that could cost the industry tens of billions of dollars. But those talks continue to drag on with no clear resolution in sight.
"We would love to have some kind of settlement," Dimon said on the conference call. "But there are 50 state AGs. It looks like it's getting bogged down."
Related:
Feeling pinched? You're not alone
Finance officials around the world are working to find a solution for the global economy to grow. Insight with Simon Johnson, MIT entrepreneurship professor/former IMF chief economist.
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