[Mb-civic] An article for you from an Economist.com reader.

Wed Jan 25 11:13:35 PST 2006

- AN ARTICLE FOR YOU, FROM ECONOMIST.COM -

Dear civic,

Michael Butler (michael at intrafi.com) wants you to see this article on Economist.com.

(Note: the sender's e-mail address above has not been verified.)

Subscribe to The Economist print edition, get great savings and FREE full access to Economist.com.  Click here to subscribe:  http://www.economist.com/subscriptions/email.cfm 

Alternatively subscribe to online only version by clicking on the link below and save 25%:

http://www.economist.com/subscriptions/offer.cfm?campaign=168-XLMT

DISPIRITED
Jan 24th 2006  

America's biggest banks decelerate

Perhaps banks really believe that bolstering earnings through temporary
fixes is a good strategy, a kind of show of effort, even if it is not
particularly effective in convincing the market that they run promising
businesses. Over the past week, America's three biggest
banks--Citigroup, J.P. Morgan Chase and Bank of America
(BofA)--reported earnings that looked good at first glance, only to sag
under scrutiny.

BofA was the most brazen of the three, trumpeting its "record" results
for 2005 in the headlines of a press release packed with a long list of
achievements. Investors skipped the headline and the hype, focusing
instead on the sequential decline in quarterly results and the bank's
cost of financing--hitherto low, but set to rise now that its merger
with MBNA, a credit card issuer, has been completed. Sober comments by
Al de Molina, BofA's chief financial officer, on January 23rd were well
received, in a sober sort of way: growth, he acknowledged, is slowing.
To their credit, Morgan and Citi did not bother to hype results that on
the surface were quite good but substantially bolstered by clearly
disclosed special items. That spared them from the sniggers directed at
BofA but nonetheless led to some selling of their shares.

More than one-quarter of Citi's and Morgan's fourth-quarter earnings
stemmed from the sale of an asset: in Citi's case, a gain recorded on
the swap of its asset-management business for the brokerage offices of
Legg Mason; in Morgan's case, the disposal of BrownCo, a quirky
discount broker (it doesn't even provide quotes) beloved of experienced
traders. Morgan and Citi also benefited from the recovery of money
previously put aside for litigation and the release of some loan
reserves.

Optimists might see these tweaks as demonstrating the virtues of large
banks: they seem to have all sorts of hidden wealth to extract when
they need it; and a reduction in money set aside for bad loans and
litigation suggests that conditions are getting better, not worse.
Furthermore, in the interest of efficiency, Morgan is shedding all
sorts of duplicative property inherited from one of the many banks
subsumed during its acquisitive history. Citi's recent disposals have
ranged from the obvious (its headquarters) to the obscure (an Indian
software company). No one outside its executive suite has a clear
picture of how many assets it might still have stashed away.

In a manner of speaking, BofA disposed of assets too, by shedding
excess potential customers over the past year. This was part of its
effort to stay below the 10% ceiling on any one bank's share of
American deposits, until after its merger with MBNA was approved by
regulators. It achieved this, according to Charles Peabody, an analyst
at Portales Partners, by paying an unusually low rate on deposits, thus
minimising growth.

Sceptics shudder, believing that at best, these techniques are
deceptive; and that at worst, they amount to the sale of seed corn,
reducing future returns. Once they are stripped out, earnings have been
sluggish. "Where's the forward momentum?" asks David Hendler, an
analyst at CreditSights, an independent research firm. Reversing
strategy is costly. BofA, for example, will soon be paying more for
money (to attract customers ensconced elsewhere) and doing so at a time
when it would really like a flood of new funds to feed the credit-card
business of MBNA.

Morgan has done a particularly good job of controlling expenses, but at
some cost. A tough line on bonuses recently prompted many valuable
employees to prepare their resumes. It is only belatedly spending money
to rejuvenate a retail branch network that for years suffered from
underinvestment. And, like BofA, it had poor results from trading.
Perhaps it should be spending more. Tellingly, shares of all of these
banks sell at a discount to the rest of the stockmarket,
notwithstanding their demonstrated resilience recently in surviving a
recession and a deluge of litigation, as well as benign economic
conditions that should augur well for future returns. 

Conveniently, the banks provided two external villains for their
troubles which have the virtue of being plausible and temporary. The
first, a recent change in bankruptcy law, encouraged people heavily in
debt to file last year, thus pushing up defaults; the second is a
closing of the gap between long- and short-term interest rates that
undermined banks' classic formula--take short-term money cheaply from
depositors and lend it for the long-term, pocketing the spread.

Theoretically, neither of these problems is much to worry about. A
one-time surge in bankruptcy should mean that the weakest debtors have
now been dispensed with, so that defaults will be even lower in the
future. Rates for lending in the distant future should return to being
higher than those for the short term. And all of these banks are more
balanced in their operations than they were not long ago. BofA has a
nationwide franchise. Morgan was probably thrilled to see revenues
surge from equity underwriting and merger advisory work, both fields it
has long tried to break into. Citi has an oddly stunted retail
franchise in America, but its vast international operations did well.
None of these banks is suffering.

And yet, something is missing. Mr Peabody speculates it may be that the
real cost of the financial industry's various scandals was not in the
initial fines or the distraction of litigation, but rather in blunting
the banks' aggression. Big banks may be nicer than ever--cutting the
absurd range of fees for overdrafts or bounced checks or other routine
matters, and holding themselves back from controversial trades--but as
a result seeing smaller returns. This is plausible but of course
impossible to know. Every bank has taken pains to change how it is run.
Last year one of the big fears was "headline risk", meaning being on
the front page for doing something wrong. They have now got themselves
off the front page, but perhaps in doing so have lost some of their
bite. 

- - - - - Send comments on this article to Buttonwood (Please state
whether you are happy for your comments to be published)

Read more Buttonwood columns at www.economist.com/buttonwood[1]

-----
[1]
http://www.economist.com/research/articlesBySubject/display.cfm?id=2512631

See this article with graphics and related items at http://www.economist.com/agenda/displaystory.cfm?story_id=5434784&fsrc=nwl

Go to http://www.economist.com for more global news, views and analysis from the Economist Group.

- ABOUT ECONOMIST.COM -

Economist.com is the online version of The Economist newspaper, an independent weekly international news and business publication offering clear reporting, commentary and analysis on world politics, business, finance, science & technology, culture, society and the arts.
Economist.com also offers exclusive content online, including additional articles throughout the week in the Global Agenda section.

-	SUBSCRIBE NOW AND SAVE 25% -

Click here: http://www.economist.com/subscriptions/offer.cfm?campaign=168-XLMT

Subscribe now with 25% off and receive full access to:

* all the articles published in The Economist newspaper
* the online archive - allowing you to search and retrieve over 33,000 articles published in The Economist since 1997
* The World in  - The Economist's outlook on the year
* Business encyclopedia - allows you to find a definition and explanation for any business term

- ABOUT THIS E-MAIL -

This e-mail was sent to you by the person at the e-mail address listed
above through a link found on Economist.com.  We will not send you any
future messages as a result of your being the recipient of this e-mail.

- COPYRIGHT -

Economist.com privacy policy: http://www.economist.com/about/privacy.cfm