Given market plunges around the world, we may need something to cheer us up a tiny bit:
Even Citigroup Inc., by far the hardest hit of the big U.S. banks by
subprime-related problems, earned $3.62 billion last year. That was with a
$9.83 billion fourth-quarter net loss and more than $22 billion in writedowns
and additions to loan-loss reserves.For JPMorgan Chase & Co., the third-biggest U.S. bank, the focus was on the
34 percent drop in fourth-quarter profits from a year earlier. Its full-year
$15.4 billion profit, a record, was largely ignored. …Economist Robert E. Litan, a senior fellow at the Brookings Institution who
has done numerous studies of the U.S. financial system, said the banks are in
far better shape than the dire assessments suggest.”Strip out the losses and Citi could make close to $10 billion a quarter,”
Litan said. Noting how quickly the bank has been able … to replace the
capital depleted by losses, he added, ”Why would anybody buy stock if they
thought Citi was going down the tubes?”
The link is from Mark Thoma. This is one of several reasons why I don’t see solvency problems — apart from homeowners that is — as today’s major economic plague. Elsewhere, it seems that tax-free municipal yields are higher than Treasury yields, an unusual and counterintuitive state of affairs; this is a sign that large institutional investors are spooked and have their head in the proverbial sand. They’ve run into T-Bills, but they have no reason to hold the tax-free munis. That also means if you see a big spread between T-Bills and commercial paper, you shouldn’t interpret it as a high implied default risk for major companies.
The way to solve the T bill – CP spread false signal
is to use a longish moving average depending on
your timeframe for default.
Also, I think a federal bailout is inevitable for
some institutions to the tune of billions of dollars.
Whoops, your comments section isn’t working correctly. What I was trying to say is the fact that you think Citicorp earning 3 billion bucks is “something to cheer us up a tiny bit† says a lot about the society we live in.
Yields on munis could be up because people are worried about the credit quality of bond insurers
Prof. Cowen –
I’m confused about the interest rate cut earlier today. If cheap access to credit led to the subprime mortgage “mess”, and the price of oil is at least partly due to the low value of the US dollar, why would the Federal Reserve take an action that (1) makes money cheaper and (2) will further devalue the dollar? Perhaps you could explain why I am wrong to think that this emergency rate cut makes no sense.
Thanks.
insurance companies that gurantee the munis supposedly have some major subprime issues. that is why the spreads are messed up. mbia tried to borrow to shore up its balance sheet and was going ot have to pay too high of a rate.
when citi has to borrow from middle east investors to shore ups its balance sheet and pay double digit rates to do so something is wrong.
We have the bestest economy, bestest democray and smartest bankers in all of history and the world.
Its all the best…..the marvel of our free market corruption free society is the envy of the world…..yawn.
tiresome when economists spend all their time defending myths……..
HOWS THIS FOR LAUGHS,HOW ABOUT SOME TRIL-LIONS DOLLAR
BAIL-OUT???
One difference between financial commentors and economic commentors is that the financial ones have contempt for each other. Today … it shows in the comments.
Oh joy – the (stupid, greedy, risk-laden) rich got richer. I can sleep better knowing that there are always shills enabling ‘the system.’
Marine Lance Cpl. Joshua Bleill learned to walk again thanks to bluetooth technology. While on a tour in the middle east in 2006, Bleill had both of his legs amputated from the knee down after a bomb exploded under his humvee. The bluetooth technology allows Bleill to move his legs together as though they were real. The bluetooth sends signals to both legs allowing them to move in accordance with the other; while one moves forward, the other moves backward. While most news shows are filled with the most recent deaths and bombings, CNN put a twist on an unfortunate story and gave America something to smile about.
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