Although the US recession has ended, for big American banks, 2010 could be a torrid year. This year began unhappily. Arianna Huffington, the woman behind The Huffington Post, urged Americans to make a New Year resolution to move their money from big banks and deposit it with community banks.
Critics claim Huffington’s crusade will fail. Nevertheless, Huffington’s campaign has touched a wellspring of outrage among Americans over big banks’ inordinate risk-taking and greed – traits widely-believed to have caused the US financial crisis.
A more significant threat is tough regulatory reform. Congressional proposals include giving regulators the power to break up big banks and reinstating the Glass-Steagall Act. Ironically, its repeal in November 1999 prompted two senators to warn this would someday wreak havoc on the US financial system.
Implemented in 1933, the Glass-Steagall Act required a separation between commercial and investment banking to reduce potential conflicts of interest that many claim were factors that led to the stock market frenzy before the Great Depression in the 1930s.
At the start of hearings by the Financial Crisis Inquiry Commission last Wednesday, chief executive officers (CEOs) of the Big Four banks – Bank of America, Citigroup, JP Morgan Chase and Wells Fargo – argued banks need to stay big, size offers economies of scale and corporate clients prefer an integrated bank.
For big banks, a more immediate threat is US President Obama’s proposed US$90 billion (RM300.6 billion) bank tax. Dubbed the Financial Crisis Responsibility Fee, the levy will be paid over 10 years by financial institutions with assets exceeding US$50 billion (RM167 billion). Scheduled to take effect after June 30, the tax could offset the estimated US$117 billion (RM390.8 billion) losses in the Troubled Asset Relief Programme (TARP) used to bail out ailing companies, including banks and carmakers.
Betty Graseck, a banking analyst at Morgan Stanley, estimates the bank tax will be minimal; it will reduce about 5% from top banks’ bottom lines this year. Democrats are confident Congressional approval will be forthcoming. With mid-term Congressional elections scheduled this November, Republicans could find it difficult to oppose the tax without seeming to support bankers widely reviled by American voters.
Another significant threat is the lacklustre US economy. Two American Nobel laureates – Joseph Stiglitz and Paul Krugman – recently urged the Obama administration to implement a second stimulus plan because the US economy could stall in the second half of this year.
Although US economic growth turned positive in third quarter last year, growing by 2.24%, some economists claim this was largely due to the government’s “Cash for Clunkers” programme – an initiative that gave consumers up to US$4,500 (RM15,030) to trade in their old cars.
Perceptions the US economy is still weak were buttressed by JP Morgan Chase 2009 earnings.
Released last Friday, it is the first among the big banks to do so. Widely regarded as the best managed US bank, it is a bellwether for the financial sector.
JP Morgan set aside US$4.2 billion (RM14 billion) to cover mortgage, home-equity and other consumer loan losses in the fourth quarter – a sharp jump from US$653 million (RM2.2 billion) for the year-ago period.
Additionally, its failure to say losses in consumer loans and mortgages had peaked suggests American consumers are still hurting and thus unlikely to drive US economic growth this year.
Although the bank’s net profit totalled US$11.7 billion (RM39 billion) in 2009, more than double what it made the previous year, this was mainly due to its investment banking and private equity divisions. JP Morgan’s profits in investment banking and losses in consumer loans underscore the potential costs for banks if the Glass-Steagall Act is re-introduced.
More worrying, CEO Jamie Dimon said in a conference call with investors: “We don’t know when the recovery is.” JP Morgan’s uncertain outlook alarmed Wall Street and triggered a sharp 100.90 point fall in the Dow Jones Industrial average to 10,609.65 last Friday, its worst performance this year.
Yet another potential pothole is sovereign debt. For the first time, financial markets are starting to price in a bigger probability of a default among industrialised countries than among investment-grade companies, David Oakley writes in the Financial Times.
According to the Markit indices, it now costs more to insure the combined risk of default of Europe’s developed nations – including Germany, France and the UK – than it does the combined risk of the continent’s top 125 investment grade companies. Similarly, insuring the UK’s debt is now double that of its biggest companies.
For US banks and possibly their counterparts worldwide, using the analogy of a traffic light, if 2009 was red, this year could be amber rather than green.
thesundaily.com
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