Do Plump Profits Mean Banks Have Recovered?

The nation's biggest banks — Goldman Sachs, JP Morgan, Bank of America, Citigroup — have reported profits for the second quarter, and, at least on the surface, they look plump. Does this mean the financial crisis is over? Wall Street Journal economics editor David Wessel talks with Linda Wertheimer.

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STEVE INSKEEP, host:

It's MORNING EDITION from NPR News. I'm Steve Inskeep.

LINDA WERTHEIMER, host:

And I'm Linda Wertheimer. The nation's biggest banks - Goldman Sachs, JPMorgan Chase, Bank of America and Citigroup - have reported profits for the second quarter. And while they may not yet be fat and happy, they're looking plump. To find out more, we turn to David Wessel. He is the economics editor of the Wall Street Journal.

Good morning, David.

Mr. DAVID WESSEL (Economics Editor, Wall Street Journal): Good morning.

WERTHEIMER: It's been less than a year since the worst moments of the financial crisis. Do these big profits mean the banks are all better?

WESSEL: I don't think so. What we've seen is the very strongest banks -Goldman, JPMorgan - are taking advantage of the weakness of some of their competitors, and their profits are zooming back. But the weaker ones - Bank of America, Citigroup - took some one-time only gains in the second quarter, stuff that they can't keep doing. They're still hobbled by bad loans.

GE Capital - which is owned by General Electric, which we don't think of as a bank, but is pretty close to one - said its profits were down 80 percent. And, of course, we see CIT, the business finance house, struggling to get some time from its lenders so it doesn't have to file for bankruptcy. So they're not out of the woods yet.

WERTHEIMER: Are you telling me that these good quarterly results don't necessarily mean good news for the larger economy?

WESSEL: Well, it's good news for the larger economy. Some of the banks are beginning to function more normally so they can begin lending. But when you look at the details of the bank's results, you see a number of them made a lot of money by trading and investment banking, but not by making old-fashioned loans and getting them paid back.

The loans business is being hit very hard by the economy, because high unemployment and other problems are making it hard for businesses and consumers - or many of them - to pay back their loans. So we saw, for instance, the CEO of Citigroup say that the rate of growth in consumer losses may be moderating, which was as close as he could come to being optimistic.

WERTHEIMER: Are these banks and their shareholders profiting from the taxpayer help?

WESSEL: Oh, absolutely. I mean, first of all, if the entire financial system had collapsed, all of the banks, even the strong ones, would've been hurt. So some of the banks have paid back the money that the treasury invested in them, particularly Goldman and JPMorgan. But they benefited handsomely from the federal rescue of the entire system. And they were able to sell bonds that were guaranteed by the government, which is pretty unusual.

Some of the other banks - Bank of America and Citi, for instance - are still very much wards of the state. Between the two, they have $90 billion in taxpayer money. They're not out of trouble yet. And so the question is raised sort of did the government get a good enough deal by dealing with these banks? And there's an argument about that.

WERTHEIMER: If the banks - or some of them - are really making this kind of big money, do you think that they're going to wander back into the area of big salaries and mega bonuses?

WESSEL: Well, that's a good question. It was kind of surprising to me that we saw a couple of stories last week about big banks paying tons of money - Bank of America, Citigroup - paying millions of dollars, but I think that we're going to - we'll probably - so I was surprised they did it. It's certainly bad PR, and it suggested an awful lot of confidence that they could keep making money in the future.

But I think that as the finance sector shrinks, as we expect, as there are fewer big players, it's unlikely that we'll return to the bad old days when you were reading of so many people making lots of money.

It's also going to cause an enormous political uproar if taxpayer-financed banks are able to pay six, $7 million. And, of course, it's also going to fuel some of the stuff you hear in Congress about raising taxes on rich people, because if people read in the paper that these companies are making so much money and paying so handsomely, people are going to ask: Why shouldn't those people pay higher taxes?

WERTHEIMER: David Wessel, economics editor for the Wall Street Journal, thanks very much.

WESSEL: You're welcome.

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