Does she even recognise the concept?
Bank-slayer Meredith Whitney has been speaking with Steve Forbes on the subject of the financial industry. Most of it is a recap but she does give her (fresh) opinion on the mysterious early 2009 profitability of US investment banks like Citigroup, JP Morgan and Bank of America.
SF: Now, in January and February, it seemed, at least to an outsider, that even regardless of what the books said, the banks seemed to be doing very well on a cash-operating basis, the rollover alone. You were paying fees. You are paying fees. You were paying 10,000 points above LIBOR. Do we have a disconnect here? Where on a cash basis, the banks are doing well; where in a statutory, regulatory basis, they’re still not out of the woods?
MW: Well, on a cash basis and on a trading basis, they’re doing, facilitating transactions. January and February, it’s all relative, right?
SF: Right
MW: Relatively good months. On an accrual basis, that’s where you get into problem areas. Because your loan is only as good as it pays you back. And so, the loans are paying back less. As I said, one of the two main assumptions that goes into valuing any of your loans, accrual-based loans, is home price appreciation, but also unemployment.
A lot of the banks were carrying seven-and-a-half to eight percent unemployment. We’re already over 8%. So, there are going to be big true-ups this quarter. Some parts of the business are OK. And what’s interesting, for a Goldman Sachs, 70% of the capital markets competition has gone away, or dramatically pulled in their horns.
So, it’s a smaller pie. But you’re getting more of a market. And the government actually is churning a lot of fees for Wall Street. So, there’s trading activity there. I don’t know how sustainable it is because bank revenues, cash-based revenues on the non-accrual-based loans, should correlate to some multiple of the GDP and global GDP. And as we know, the global GDP is coming down.
In summary.
SF: So, you’re staying away from bank stocks still?
MW: I am staying away from bank stocks still.
Related links:
Transcript: Meredith Whitney interview – Forbes
Bankers’ greatest fear – FT Alphaville
Global earnings may freefall after ‘throwaway’ quarter – Bloomberg