Tuesday, April 14, 2009

Bank Earnings and TARP

Posted on the Wall Street Journal's MarketBeat by Dave Kansas:

Goldman’s early, surprisingly strong quarterly earnings come in the wake of similarly surprising good news from Wells Fargo last week. With all eyes on the financials, the early shouters are placing inordinate pressure on the big banks and semi-banks that will follow.

With such good news coming early, many analysts feel that perhaps the worst of the financial crisis is past. It may be. But another chapter could be unfolding: a sorting out of good and bad banks, with the good ones working quickly to repay TARP funds.

Goldman has signaled clearly that it wants to pay the government back as soon as possible. A number of other smaller banks have also expressed a desire to give the government its money back.

On the face of it, this makes sense. If you’ve got government money, the government will want a say in your business. At the same time, one reason policymakers insisted that nearly every bank take TARP money is so that no bank would look inordinately weak.

Now, many banks will face the temptation to match the Goldman gambit, even if they aren’t quite ready to do so. The alternative is to waken the dormant bank vultures who wreaked such havoc in the fall.

The coming batch of earnings announcements will shed more light on just how strong the financial sector is performing. J.P. Morgan Chase is scheduled to report on April 16, and its CEO Jamie Dimon said March was a little tough. Citigroup’s report is due April 17. Its CEO, Vikram Pandit, boasted in a memo that February and January went well.

Bank of America, rather quiet of late, is scheduled to report on April 20. Morgan Stanley reports the week of April 20 and many analysts are forecasting a loss. And U.S. Bancorp, a rival to Wells Fargo, is slated to report on April 21.

Any of these banks could report early and strong, which would add to the sense of recovery. More likely, some challenging news will come forth. That will present policymakers with a challenge. Should they encourage those who are able to pay back TARP money quickly, or maintain the ‘everyone’s in this together’ approach? That issue looks like the next hurdle for the market and investors.


Bill said...

I am not sure that GS giving back the TARP money is a good thing for share holders. First thing, it allows them to give the executives the exorbitant bonuses that take away from dividend payments and capital for expansion.
Moreover, I am doubtful that the earnings reports really portray the true picture of their business. A relaxation of mark to market rules allows for unrealistic expectations from banks. For a more in depth explanation, check out this video from Peter Schiff, the man who correctly predicted the economic downturn and its causes: http://www.schiff2010.com/video/2009/april/peter-schiff-explains-illusion-bank-earnings

Cormick Grimshaw said...

Like you say, Goldman's earnings report is bogus, as will be those from the other big banks...