Ofuoma Odje blogs about recent earnings from the Financials

Should the Banks be believed?
Since the DOW and the S&P touched 12 year lows of 6763 and 666 respectively in early March 2009, the stock market has rallied by approximately 20%. The move has been fueled mainly by the Financials.
So what has changed since the massive shock of the September 2008 Financial Crisis?
A few Banks like Citibank, Bank of America and JP Morgan have all come out to say they made money in first 2 months of 2009. These claims of course spearheaded the current rally in the Financials and the broader market.
However, taking a closer look at these claims and insinuations, one could ask how Banks that were deemed insolvent only a few months ago have suddenly returned to profitability with overwhelming alacrity.
Recent earnings reports from Goldman Sachs, JP Morgan Chase, Citibank and a preview Wells Fargo’s numbers have all been better than expected and have resulted in the Financials rallying higher and higher.
So how could so many investors be so wrong a few months ago when they sold banks into multi year lows?
Or could they have been right anyway?
Let’s look at some key economic indicators between the months of September 2008 and March 2009, a climate where these Banks have claimed to make such remarkable profits.
First of all, nearly 2.6 million jobs were lost in 2008 alone, with another 1.9 million more lost in the first quarter of 2009. To be quite specific, let’s look some headlines of the Government’s Job Reports between the months of September 2008 and March 2009.
---159,000 Jobs Lost in September 2008, the Worst Month in Five Years

---240,000 jobs lost in the US in October 2008

---The nation’s employers cut 533,000 jobs in November worst in a generation

--- The U.S. economy lost 524,000 jobs in December, the 12th straight month of decline.
---Employers slashed 598,000 more jobs in January as unemployment rate climbed to 7.6%.

---651,000 US Jobs Lost in February; Unemployment Rate Now at 8.1%

---US jobs lost in March 2009 totaled 663,000; Unemployment Rate Now at 8.5%

Add to this the wave of foreclosures and bankruptcies filed by individuals, corporations and institutions, and you will get a clear picture of a depression at the least.

Examples are all around us. Household names like Linen and Things, Circuit City and Sharper Image are now history thanks to the financial crisis.
Only last week Mall Operator GEN GROWTH PROP INC (GGP) filed for bankruptcy protection sparking concerns about new wave of trouble in commercial real estate.

So how did these Banks manage to net outstanding profits in this same time period? No one can say for sure but we can speculate.

We know that these Banks received TARP Money from the Federal Reserve so that is not in question.

What’s in question however, is that the direct TARP money the banks received could not by itself have resulted in these earnings.

AIG might well be the answer to this mystery. Since the beginning of this financial crisis, the over-leveraged AIG has received more than $170 Billion in Taxpayer money to satisfy debts caused by the collateralized debt obligations, credit default swaps and other similar financial instruments it underwrote prior to the September 2008 financial crisis.

The Washington Post Disclosed some US and foreign Banks and entities that received some $85 Billion of this Bailout money.
You can read more by visiting the url below.
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/15/AR2009031501909.html

It is quite clear that US Taxpayer money went to bailout U.S and other Foreign Banks and financial institutions hence we have seen healthy earnings from some of these institutions.

If this is indeed the case behind these profits, then we can say they were nothing more than a transfer of money from U.S taxpayers to banks, with AIG acting as the go-between.

AIG however, is potentially still on the hook for several hundred billions more, should certain defaults occur on financial instruments it has underwritten

This could mean that second quarter earnings for these banks would be anything but as rosy as these first quarter shows, unless Bailout Nation continues to expand and congress approves more bailout money after a well anticipated mighty political battle on Capitol hill.

With the TARP running low on funds and the Government refusing to say how much is left, could it be that the U.S Taxpayer is on the hook for a few hundred billion bucks more in bailout money?

Or could this really mean that we would see another decline in the financials as second quarter earnings paint a grim picture?

We surely will find out between now and the end of the 2nd quarter of 2009, at least as far as the Banks and financials are concerned.

Ofuoma Odje