Analyst: Banks Need Fundamental Reforms Bank analyst Karen Petrou says the United States can expect to see a lot of volatility in the financial industry. She says the industry as a whole — including the 20 largest banks — have not yet made fundamental reforms to stabilize the industry.
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Analyst: Banks Need Fundamental Reforms

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Analyst: Banks Need Fundamental Reforms

Analyst: Banks Need Fundamental Reforms

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STEVE INSKEEP, host:

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

The latest news from the banking industry is easy to report and hard to judge. Citigroup lost money again, but the bank says it would have made a profit but for a couple of required payouts, and the news is better than expected.

This comes after some other big banks reported positive earnings. And boosters of bank stocks have been saying this week they're vindicated.

Do you mean to say that the banks are safe and out of trouble?

Mr. RICHARD BOVE (Rochdale Securities): Absolutely. I don't think there's any question about that at all.

INSKEEP: There's no question to analyst Richard Bove, who spoke with us earlier this week, though others do have questions, as we'll hear this morning. We begin with bank analyst Karen Petrou in Washington, D.C. She says she's doubtful about banks.

Ms. KAREN PETROU (Federal Financial Analytics): We're in a recession, a deep, deep recession, and banks are critical to pulling us out of that, but they're also deeply a part of that. And they're not healthy 'til the economy is healthy as well.

INSKEEP: People use the phrase zombie banks. You're laughing. Do you accept that phrase for at least some of those 20 huge banks?

Ms. PETROU: I think there are several large banks that should have been broken apart and sold off and to some degree, perhaps, preserved. The bank regulators have a tool. It's called a bridge bank - which means they can keep the very largest banks open so that you don't fear systemic risk. But you do force management, shareholders to take some hits. We don't prop up, quote, too big to fail banks. It's not good for the other banks, because we have some very healthy institutions that aren't able to do what they're fully capable of doing because of the pall that's been cast on the industry as a whole.

INSKEEP: You've warned us not to look at the industry as a whole but to look at specific banks. What's a zombie bank? Name a few.

Ms. PETROU: I don't like the term zombie bank because it suggests that they're walking around, you know, in a glazed fashion, bouncing from wall to wall, you know, ravenously looking for small children to consume.

INSKEEP: If there is another monster you'd rather substitute, please go ahead.

(Soundbite of laughter)

Ms. PETROU: I don't think it's a - just deeply distressed institutions that are now living, basically, off the public purse. There you see Bank of America, Citigroup, I think Morgan Stanley and Goldman Sachs amongst the very biggest banks still have some significant issues to resolve before we can be assured that they are long-term survivors.

INSKEEP: When we spoke this week with the analyst Richard Bove, he made an interesting point in that he said the biggest problem these banks have is a fear that these mortgage-backed securities in which they have so much invested could turn out to be worth nothing. And he has argued that as time has gone on, it's just this expectation of loss at some point that is dragging down banks. And he says that's not real, that fundamentally, the payments are still being made.

Ms. PETROU: Well, I just don't agree with that in the residential mortgage sector. We're seeing record amounts of delinquencies, 60-day delinquencies, foreclosures. The fourth-quarter numbers were not only a record, but they were also up dramatically from the third quarter of last year, and we're seeing that moving through.

INSKEEP: And even if 90-some percent of the loans are still performing appropriately, that still may not be enough.

Ms. PETROU: Ninety-some percent of all loans in the banking system are performing appropriately. Residential mortgages are sicker than that. But let me step back and - banking is what's called a leveraged business. So if I raise a dollar of capital for $10 of loans, if $1 of that $10 of loans goes bad, I've lost my capital. Sure, I have $9 of performing loans, but that $1 of capital, which is the heart of the bank, and its shareholder investment and its protection for taxpayers is gone, it's evaporated.

INSKEEP: Hmm. You know, I was traveling around last week and picked up a New Jersey newspaper, and there was the front-page headline: It Appears The Worst Is Over. Do you feel that way?

Ms. PETROU: I'm very glad the worst we saw in the fourth quarter is over. We haven't yet had time to do the fundamental reforms. The banks haven't been able to squirrel away the necessary capital because they're still working through their current losses and looking down the barrel of still some more. Even if the worst is over, as I hope it is, we will still see a lot of market volatility, and the financial system will rattle and roll for some time to come. There's not the signs of real, fundamental, forward-looking profitability at all but a few of the very biggest banks.

INSKEEP: Karen Petrou of Federal Financial Analytics in Washington, D.C. Thanks very much.

Ms. PETROU: Thank you.

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