Government Efforts to Flog Financial Industry have Failed

A number of major banking institutes, such as Citigroup, Bank of America, Goldman Sachs, and JPMorgan Chase have seen some strong profits lately, but it is primarily from the sale of various assets or through fees on investment-banking.

The banking industry is still being hit hard and is still struggling to survive, but some profits in the industry were an unexpected surprise, as everyone expected to see losses.

Citigroup has seen $4.3 billion in profits, but this included a pre-tax gain of $11 billion for the sale of its majority stake in the brokerage unit Smith Barney, which was sold to Morgan Stanley. Citigroup also had to set aside $12.68 billion to cover loan losses, and has had to cut 30,000 jobs this last quarter.

Bank of America has seen $3.2 billion in profits but made $5.3 billion in selling assets – particularly its stake in China Construction Bank. Chief Exectuvie Ken Lewis said, “difficult challenges lie ahead from continued weakness in the global economy, rising unemployment and deteriorating credit quality that will affect our performance for the rest of the year and into 2010.” Bank of America’s non-performing loans totaled $31 billion this year.

Both of these companies received more than $40 billion in bailout funds and guarantees on hundreds of billions if distressed assets. This money came with strings attached to place these banks under the supervision of the Troubled Asset Relief Program, which banks like Goldman Sachs and JPMorgan will not have to deal with.

Bank of America has already said they will need to pay back the $45 billion in TARP funds in installments as they won’t be allowed to do it all at once. The government had forced nine of the top U.S. banks to take these TARP funds even if they did not want them so that no bank was looked at as weaker than the others. However, banks like Goldman Sachs and JPMorgan have already repaid the TARP funds, which banks like Citigroup and Bank of America have been unable to do yet.

JPMorgan sees Profits from Investment Banks as Defaults Rise

For the first time since 2007, JP Morgan Chase & Company has seen profits rise from investment-banking fees. The second-quarter earnings of JPMorgan increased to $2.7 billion or approximately 28 cents per share – an increase over the $2 billion a year earned before.

This increase in revenue from investment-banking has been a tremendous help considering the startlingly high amount of defaults occurring in consumer loans such as mortgages or credit cards. It is estimated at this time by Chief Executive Officer Jamie Dimon that the credit card business won’t see a profit between this year or 2010, and loss projections have increased for prime and subprime mortgages.

Investment banking has made $1.47 billion in profit which is 4 times the amount of profit earned in last year’s second-quarter. This profit comes from fees in underwriting stocks and bond deals, and fixed-income trading.

“The credit problems, although they have stabilized, we’re still not out of the woods,” said Gerard Cassidy, banking analyst at RBC Capital Markets. “For JPMorgan Chase, the challenge going forward is going to continue to be deterioration of credit.”

Despite this rise in profits, Chief Executive Officer Jamie Dimon predicted even more losses to occur from consumer loans. JPMorgan has already said that its losses in the credit-card department should be around 10 percent next quarter, dependent upon unemployment rates nation-wide. It’s newly acquired Washington Mutual and the cards issues by it may reach 24 percent loss by the end of the year.

For more information on this issue or further statistics, visit: http://www.bloomberg.com/apps/news?pid=20601103&sid=a6e9ZjnyvX38