The Federal Reserve should lose its authority to bail out big, failing financial firms like AIG and Bear Stearns under proposed reforms aimed at limiting the collateral damage from such failures, U.S. Treasury Secretary Timothy Geithner said on Thursday.
Geithner, in testimony to the U.S. House of Representatives Financial Services Committee, said the Fed should keep its ability to act as an emergency lender of last resort, but only to solvent firms in times of severe stress in financial markets — with Treasury consent.
“Any firm that puts itself in a position where it cannot survive without special assistance from the government must face the consequences of failure,” Geithner said. “The proposed resolution authority would not authorize the government to provide open-bank assistance to any failing firm.”
Geithner said a bill by the Financial Services Committee’s chairman, Representative Barney Frank, meets the tests for key elements of a resolution authority that the Obama administration would like to see passed.
It is a “comprehensive coordinated answer to the moral hazard problem” and does not provide any implicit guarantees for financial institutions, he said.
“We cannot put taxpayers in the position of paying for the losses of large private financial institutions,” Geithner said cheap payday advance. “We must build a system in which individual firms, no matter how large or important, can fail without risking catastrophic damage to the economy.”
Geithner said large failing firms should be put into a receivership managed by the Federal Deposit Insurance Corp that would seek to “unwind, dismantle, sell or liquidate the firm in an orderly way” where losses would be borne by shareholders and creditors of the firms.
The costs of such shutdowns would be borne by other large financial firms, imposed afterward, Geithner said. This would eliminate a standing insurance fund that creates expectations that the government would step in to protect creditors and shareholders.
Regulators also must impose tougher capital and liquidity standards on large firms that take on more risk, Geithner said, to reduce the probability of a larger firm experiencing financial distress.
But Geithner said there would not be a set list of large firms held to higher standards, adding that the government did not want to provide a false impression that such firms would be protected from failure by the government in times of stress.
(Reporting by David Lawder; Editing by Andrea Ricci)
Some 18 million smart meters are set to make their way into American homes as part of the economic stimulus plan focusing on energy efficiency, Energy Department officials said Tuesday.
The meters, which are designed to more effectively communicate with utilities and appliances, and help consumers manage their electricity more efficiently, are being distributed by utilities around the country with partial funding from the federal government that was allocated under the stimulus plan.
The 18 million meters represent roughly 13% of all electricity meters nationwide. Ultimately, the administration hopes to distribute 40 million smart meters over the next few years.
The smart meters are part of a wider government effort to upgrade the nation’s aging utility grid. The government announced $3.4 billion in funding Tuesday to help move the country toward a so-called smart grid. Utilities are putting in another $4.7 billion in matching funds.
According to the White House, these investments could reduce U.S. electricity use by 4% a year.
The money is part of nearly $100 billion in spending and tax cuts the government authorized under the stimulus plan for a variety of energy projects faxless payday advance.
Other projects announced Tuesday include the modernization of electric substations and transmission centers.
All told, 100 projects were announced Tuesday in 49 states that are expected to create tens of thousand of jobs across the country. The White House billed it as the largest single energy grid modernization effort in the country’s history.
Experts have long said the country needs to update its electricity grid, much of which was built during the early part of last century, if it is to deliver power more efficiently and handle electricity generated from sources such as wind and solar.
The funding announced Tuesday is just a fraction of what experts say is needed to build new transmission lines, computerize substations and meters, and build storage devices for a modern utility grid.
Stocks slumped Friday, in a broad-based selloff that was especially hard on the leaders of the most recent leg of the rally — banks, energy shares and transportation companies.
The Dow Jones industrial average (INDU) lost 109 points, or 1.1%. The S&P 500 (SPX) index lost 13 points or 1.2%. The Nasdaq composite (COMP) lost 11 points or 0.5%.
Stocks had risen in the morning after upbeat results from Microsoft and Amazon.com, and an encouraging reading on existing home sales. But the tone turned negative in the afternoon.
The three major indexes all ended lower for the week, after two weeks of gains amid a bigger multi-month advance.
"After seven months of mostly rallying, the buyers weren’t really here this week and the bears took that as an opportunity," said Paul Brigandi, vice president of trading at Direxion Funds.
Investors getting tired?: Since bottoming at a 12-year low on March 9, the S&P 500 has surged over 62% through its rally high earlier this week.
Although repeated predictions for a big 10% to 15% selloff haven’t materialized, smaller selloffs of 1% to 3% have popped up periodically during the past 7 months. Friday appeared to be an extension of that trend.
While the S&P 500 lost 1.1% Friday, for individual sectors, the declines were bigger.
The Dow Jones Transportation (DJT) average, which includes railroads, truckers and airlines, had surged 88% through its rally high earlier this week. On Friday it lost 3.5%.
Some market pros have said the rise in the transports is a good indicator of the economic recovery. But downbeat comments Friday from railroads Union Pacific and Burlington Northern put that optimism into question. It also gave investors an opportunity to cash out after the massive rise in the sector.
The KBW Bank (BKX) index, which tracks 20 financial firms, including Bank of America (BAC, Fortune 500), Citigroup (C, Fortune 500) and Wells Fargo (WFC, Fortune 500), has rallied over 140% between March and its peak this week. The bank sector slumped as well Friday, losing 1.6%.
A strong U.S. dollar — bouncing back from one-year lows against a slew of other currencies — added to the downturn Friday. A strong dollar pressures dollar-traded commodities including oil, which in turn drags on energy shares. Big multinationals that benefit from a weak dollar also slipped.
Stocks had rallied Thursday following upbeat earnings from 3M (MMM, Fortune 500), AT&T (T, Fortune 500) and other blue chips. The advance propelled the Dow back above 10,000 and the S&P 500 closer to 1,100. But that advance proved unsustainable Friday, even though corporate news was upbeat.
"Investors know that the earnings for the third quarter are going to be better than expected," Brigandi said. "That’s no longer going to be a catalyst. They are going to want to see something else."
Results: Microsoft (MSFT, Fortune 500) reported weaker quarterly sales and income Friday morning that easily surpassed analysts’ estimates. Cost cutting and strong sales of its Windows operating system fueled the advance.
On Thursday, Microsoft rolled out its new Windows 7 operating system, expected to boost PC sales in the coming months.
Shares of Microsoft, a Dow component, rose over 9% Friday morning, touching a one-year high, before giving up nearly half of that advance.
Late Thursday, Dow component American Express (AXP, Fortune 500) reported weaker quarterly sales and earnings that beat analysts’ forecasts. Shares fell 5% Friday.
Also late Thursday, Amazon.com (AMZN, Fortune 500) reported a big surge in earnings and revenue, thanks in part to strong sales of its e-reader, Kindle. Shares jumped 27% Friday, hitting a ten-year high.
So far, 199 companies, or 40% of the S&P 500, have reported results. Profits are currently on track to have fallen 18.2% versus a year earlier, according to the latest from Thomson Reuters. Revenue is expected to have dropped over 10% from a year ago.
Bernanke: The Federal Reserve chairman, speaking Friday, said that the financial turmoil is abating, but that lawmakers have to reform the system to help prevent a crisis of this magnitude happening again.
On Thursday, the Federal Reserve proposed a broad overhaul of pay policies at 28 of the largest U.S. banks. Also Thursday, White House "pay czar" Kenneth Feinberg called for the seven biggest recipients of federal bailout money to cut in half what they pay their top executives.
Economy: Existing home sales jumped to a 5.57 million unit annual rate in September, according to a National Association of Realtors report released Friday morning. Sales were expected to have risen to a 5.35 million unit annual rate from 5.1 million unit annual rate in August.
World markets: Global markets were mixed. In Europe, London’s FTSE 100 gained 0.7%, France’s CAC 40 lost 0.3% and Germany’s DAX gave up 0.4%. Asian markets ended higher.
Bonds: Treasury prices tumbled, raising the yield on the 10-year note to 3.48% from 3.42% late Thursday. Treasury prices and yields move in opposite directions.
Currency and commodities: The dollar gained versus the euro, after falling to a 14-month low earlier in the week. The dollar gained versus the yen.
U.S. light crude oil for December delivery fell 69 cents to settle at $80.50 a barrel on the New York Mercantile Exchange, edging off a one-year high.
COMEX gold for December delivery fell $2.20 to settle at $1,056.40 an ounce. Gold has surpassed records repeatedly this month due to the weak dollar and longer-term worries about inflation.
Private equity shop Cerberus plans to float gun-maker Freedom Group soon. It had better hurry. President Barack Obama’s victory sent weapon sales — and the valuations of firearms producers — shooting upward. Falling backlogs hint sales could plunge. The U.S. gun bubble may backfire.
Two sparks set off this speculative burst in the gun business. First, fears of economic calamity inspired sales of weapons — Sturm, Ruger’s 30 shot autoload SR-556 rifle is useful according to the company for shooting varmints and for "personal defense", presumably pesky biped varmints.
Second, gun collectors feared a Democratic president would restrict gun ownership. After all, you can’t buy the SR-556 in blue-state strongholds California and Massachusetts.
There’s plenty of anecdotal evidence of mania in the sector. Retailers reported ammunition shortages. Gun show attendance overflowed. Firearms factories are running flat out.
Meanwhile, insiders are preparing for a slowdown. Smith & Wesson diversified into security systems. Cerberus’ decision to sell may be indicative of a top — the durability of recent demand is indeed listed as a risk factor in Freedom Group’s prospectus.
The figures are more damning. Total U.S. firearm sales should be around $3 billion this year. That’s twice to three times as much as is typically spent according to estimates derived from Treasury excise taxes. Background checks over the past 12 months, which are a leading indicator of gun sales, were 50% higher than the levels reported during the middle years of the decade.
Naturally, rising sales lit a fire to stocks of gun makers and sellers. Armaments manufacturers Smith & Wesson (SWHC) and Sturm, Ruger (RGR) saw their stocks rise 115% and 85% respectively since the election last November. Hunting superstore Cabelas (CAB) has risen 70%.
This bubble may already be deflating. Smith & Wesson’s backlog hit $268 million earlier this year and shrank to $177 million last quarter due to cancellations and fewer orders. Considering it only stood at $50 million in April 2008, the backlog could have much further to fall. Sturm, Ruger reported roughly similar figures.
This could prove painful for all involved. If sales fell to more typical levels of recent years, up to two-thirds of U.S. gun sales could disappear. And they could fall further. There are somewhere between 200 million and 300 million fireable guns (estimates vary widely) already in the U.S. Firearms have a very long lifespan if properly treated.
Gun buyers may well decide their now-stuffed racks don’t need more company for a few years.
Microsoft is banking on Windows 7 to breathe new life into a PC world where most computer users are running XP — an operating system that was released in the early days of the Bush administration.
Experts expect that PC users will change their operating system for the first time in about eight years when Microsoft (MSFT, Fortune 500) launches Windows 7 on Oct. 22.
Microsoft’s last operating system, Windows Vista, was a disaster when it was released in 2007. Vista was plagued by bugs, software incompatibilities, sluggishness and annoying security alerts. The episode nearly destroyed the tech giant’s reputation with consumers.
"The stakes for Microsoft are astronomically high after the Vista debacle," said Scott Anthony, managing director of Innosight Ventures, a venture capital and consulting firm. "There is a lot of hunger for computing power around the world, and this release will be a real test for Microsoft."
Positive reviews for Windows 7 have been pouring in. Computer experts say that Windows 7 is good — if not perfect — and has a shot at eventually usurping XP as the world’s most prevalent operating system.
Right now 71.5% of PCs are still running XP, according to OS market share tracker netmarketshare.com, while 18.6% of PCs are running Windows Vista.
"There was lots of negativity around Vista, and Microsoft lost a lot of goodwill with its customers," said Ken Allen, a portfolio manager at T. Rowe Price who manages a tech fund that includes Microsoft as one of its holdings.
Microsoft has aggressively been rolling out products and services (think Bing and Zune HD) to boost its sales, which have declined in the previous two quarters. Its third quarter ended March 31 marked the first time sales fell in Microsoft’s 23-year history as a public company.
"The ‘bad will’ that Microsoft engendered could be reversed if Windows 7 is well received," said Allen.
It appears Microsoft is on the right road. Demand for new computers is starting to heat up again, and many users are looking for an operating system upgrade. Windows 7’s release coincides with holiday season shopping. With the economy showing signs of recovery, consumers may be more willing to loosen their purse strings.
What XP users can expect: Windows 7 is faster, more secure and easier to network with other computers than XP. Microsoft has also added a number of features to simplify tasks.
For instance, Windows 7 unveils a more efficient task bar allowing users to switch more easily between programs than the current Alt-Tab function in Windows XP. It also allows users to preview programs by hovering over icons on the taskbar.
Users will also be able to simply shake their mouse to unclutter their desktop rather than having to minimize multiple windows.
"Windows 7 is a far superior product than previous versions, and no one will be disappointed if they use it," said Vishal Dhar, co-founder of iYogi, a global tech support company for consumers. "At the right price point, [consumers] will upgrade for the new features."
Dhar said people used to XP will be most pleased with Windows 7’s video editing capabilities, which XP did not accommodate, and speed. He also said the $119 upgrade price is likely low enough to lure people to upgrade.
But there’s one hitch and it’s a biggie: upgrading is far from easy. XP users who choose to upgrade their computers to Windows 7 will have to either wipe their hard drives or re-install all of their applications. That means finding the product keys and old CDs. As a result, some experts say XP users interested in Windows 7 are better off just buying a new computer.
Slow boost to PC sales: While many experts expect a brief pop in PC sales from Windows 7, most anticipate the bulk of those sales to occur next year.
"Adoption of Windows 7 may take a while longer than some expect," said Scott Anthony, managing director of Innosight Ventures, a venture capital and consulting firm. "A lot of consumers are going to wait because they heard about people getting burned on Windows Vista."
Tech analysts also expect businesses to delay adoption of Windows 7 until next year.
"We don’t expect the release of Windows 7 to significantly influence PC demand at year-end," said George Shiffler, analyst at Gartner. "At best, Windows 7 may generate a modest bump in home demand and possibly some added demand among small businesses."
Shiffler said he doesn’t expect most larger businesses to start switching to Windows 7 en masse until late 2010, and believes vendors have overestimated how many people will be interested in the product right off the bat.
Even Microsoft CEO Steve Ballmer said earlier this month that the rise in PC sales as a result of 7’s release "will probably not be huge."
Experts say it will be difficult to judge the success of Windows 7 for a year or maybe more, but what’s clear is that Microsoft has a lot riding on the latest update to the world’s favorite operating system.
Stocks dipped Tuesday as a stronger dollar and some disappointment about DuPont and Coca-Cola’s results gave investors a reason to retreat from the recent rally.
A weaker-than-expected housing market report added to the downward pressure.
The Dow Jones industrial average (INDU) lost 50 points, or 0.5%, according to early tallies, after ending the previous session at the highest finish since Oct. 3, 2008.
The S&P 500 (SPX) index lost 7 points, or 0.6%, after ending Monday’s session at the highest point since Oct. 2, 2008. The Nasdaq composite (COMP) fell 13 points, or 0.6%, after ending the previous session at the highest point since Sept. 26, 2008.
After the close, Yahoo (YHOO, Fortune 500) reported higher quarterly earnings that beat forecasts on weaker revenue that also beat forecasts.
Also after the close, Sun Microsystems (SUN, Fortune 500) said it was cutting 3,000 jobs related to its purchase by Oracle (ORCL, Fortune 500).
Tuesday brought quarterly results from five Dow components: DuPont, Pfizer, Coca-Cola, Caterpillar and United Technologies. Apple and Texas Instruments were among the names who reported after the closing bell Monday.
Stocks gained Monday, with the Dow reclaiming 10,000 in response to a weak dollar, higher commodity prices and some earnings optimism. But the path higher over the last week has been choppy as investors have sifted through a mix of profit reports. That choppiness put pressure on stocks Tuesday.
"I’m impressed we’ve managed to stay above 10,000 as I would have expected a bigger pullback after the last few days," said Gary Webb, CEO at Webb Financial Group.
Webb said that after better-than-expected quarterly results last week from the likes of Goldman Sachs (GS, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Intel (INTC, Fortune 500) raised investors’ expectations for the reports this week. As such, even companies that have reported strong results this week have seen a mixed stock reaction.
"When we see an economy that’s going in the right direction at a stronger pace, we’ll see a more positive reaction to the profit reports," he said.
Since bottoming at a 12-year low on March 9, the S&P 500 has risen more than 62%. But some worry that the Dow’s move above 10,000 has been a ruse and that investors should beware.
"We’ve traded up on some optimism about the global recovery and there are technical reasons why the market could keep rallying," said Brian Battle, vice president at Performance Trust Capital Partners.
However, he said that a lot of the improvement in the economy and profits is being clouded by the enormous amounts of government stimulus. "Once you remove all the stimulus, the underlying economy is not as strong."
Wednesday brings reports on crude inventories, state-by-state unemployment rates and the release of the Fed’s "beige book" report on the economy. Fed Governor Daniel Tarullo speaks about the economy in Washington D.C., starting around 1 p.m. ET.
Wells Fargo (WFC, Fortune 500) and eBay (EBAY, Fortune 500) are the biggest companies reporting quarterly results Wednesday.
Blue-chip results: DuPont (DD, Fortune 500) reported higher third-quarter earnings that topped estimates on weaker revenue that missed forecasts. The chemical maker used cost-cutting to temper the impact of weak sales and surging crude and energy costs.
Looking forward, DuPont narrowed its full-year earnings guidance to a per-share range of between $1.95 and $2.05. Shares fell 2.2%.
Coca-Cola (KO, Fortune 500) reported modestly higher third-quarter earnings that met estimates on weaker revenue that missed forecasts. The company was hit by weaker sales amid the impact of the recession.
Coke was also hurt by the comparatively strong dollar, at least versus a year ago. A stronger dollar hurts companies like Coke because the majority of its profit comes from sales overseas. Those sales then convert back to less U.S. dollars. Coke shares fell 1.3%.
Pfizer (PFE, Fortune 500) reported higher third-quarter earnings and weaker revenue, both of which surpassed analysts’ estimates 24 hour payday loan. Although the maker of Lipitor, Viagra and other drugs saw a decline in sales due to the recession, that was offset by aggressive cost-cutting. Shares fell 0.3%.
Caterpillar (CAT, Fortune 500) reported weaker quarterly earnings that topped estimates on weaker quarterly revenue that missed forecasts, due to lower sales. But the heavy-equipment maker also lifted its full-year earnings forecast to a range of $1.10 to $1.30 per share, versus its previous guidance of 95 cents per share. Caterpillar gained 3%.
United Technologies (UTX, Fortune 500) reported weaker quarterly earnings and revenue that missed estimates. Looking forward, the company said it expects earnings of $4.10 per share, in the middle of its previous guidance. UTX runs jet engine maker Pratt & Whitney, Otis elevators and other businesses. Shares were little changed.
Tech results: Late Monday, Apple (AAPL, Fortune 500) reported fiscal fourth-quarter revenue and earnings that easily beat analysts’ estimates, thanks to strong sales of Macintosh computers and iPhones.
Apple also forecast current-quarter revenue in a range of between $11.3 billion and $11.6 billion, versus the $11.4 billion analysts are forecasting. Apple forecast earnings per share of between $1.70 and $1.78 versus the $1.91 analysts’ predict.
Shares rallied as high as $204 in after-hours trading Monday, an all-time high. On Tuesday, shares gained $8.90 or 4.7% to close at $200.60 per share.
Texas Instruments (TXN, Fortune 500) also reported results after the close Monday. The chipmaker reported weaker quarterly earnings and revenue that topped estimates. Shares gained 0.6% Tuesday.
Other results: Boston Scientific (BSX, Fortune 500) reported a profit versus a year-ago loss, but results were shy of forecasts. The medical device maker also cut its full-year 2009 earnings forecast due to slower sales of defibrillators and other products.
Shares fell 15.7% in very active NYSE trading.
Economy: Housing starts rose to a 590,000 unit annual rate in September, versus a revised 587,000 in the previous month. Economists expected starts at a 610,000 unit annual rate.
Building permits, a measure of builder confidence, rose to a 573,000 unit annualized rate in September from a revised 580,000 unit annualized rate in August. Economists surveyed by Briefing.com thought starts would rose to 595,000 unit annualized rate.
The Producer Price Index (PPI), a measure of wholesale inflation. PPI slipped 0.6% in September versus forecasts for a flat reading. PPI rose 1.7% in the previous month. The core PPI, which strips out volatile food and energy prices, fell 0.1% after rising 0.2% in the previous month. Economists thought it would rise 0.1%.
World markets: Global markets were mixed. In Europe, London’s FTSE 100 lost 0.7%, France’s CAC 40 lost 0.5% and Germany’s DAX lost 0.7%. Asian markets ended lower.
Bonds: Treasury prices rallied, lowering the yield on the 10-year note to 3.34% from 3.38% late Monday. Treasury prices and yields move in opposite directions.
Currency and commodities: The dollar gained versus the euro and the yen, reversing the direction after its recent slide versus a basket of currencies.
U.S. light crude oil for November delivery fell 52 cents to settle at $79.09 a barrel on the New York Mercantile Exchange, after ending the previous session at the highest level in a year.
COMEX gold for December delivery rose 50 cents to settle at $1,058.60 an ounce. Gold has surpassed records repeatedly this month due to the weak dollar and longer-term worries about inflation.
Market breadth was negative. On the New York Stock Exchange, losers topped winners two to one on volume of 1.24 billion shares. On the Nasdaq, decliners topped advancers by over two to one on volume of 2.15 billion shares.
In the past, Bank of America Chief Executive Officer Ken Lewis has received an annual salary of $1.5 million. But this year he will get nothing.
That means no salary, no bonuses. In fact, he will have to repay Bank of America Corp. (BAC, Fortune 500) the more than $1 million he has already earned in his final year on the job.
Lewis agreed to the deal on Thursday after the Treasury department’s pay czar, Kenneth Feinberg, "suggested" it to him, said Bob Stickler, a spokesman for the bank.
Stickler added that Lewis "felt it was not in the best interest of Bank of America or him to get into a dispute with the pay master."
Lewis, who announced last month that he will retire at the year’s end, will still have $53 million in pension benefits waiting for him. The outgoing chief will also have other stock awards and deferred compensation for a total $69 million payout, said Stickler.
Feinberg does not have authority to modify compensation awarded before 2009, which includes Lewis’ retirement package and stock holdings from a four-decade career at the bank.
But Stickler asked, "Since when does law apply to this administration?" As a result, he said Bank of America is unsure whether or not Lewis’ retirement package is under review by the government.
Wall Street has been waiting for Feinberg to announce rules on compensation at the seven firms that have received large government loans last year as the financial system neared collapse. And while firms are expecting Feinberg to crack down on payouts, a complete cut is bold.
The deal comes before the Charlotte, N.C.-based bank announces its third-quarter earnings on Friday morning. Analysts polled by Thomson Reuters expect earnings per share to decrease by 21 cents from a year ago when they were flat.
The world’s top cellphone maker Nokia surprised investors by taking a major writedown at its struggling networks unit and revealing a fall in its smartphone sales from the previous quarter.
Nokia, battling aggressively with competitors Apple (APPL) and RIM (RIMM) , said its smartphones market share fell to 35% in July-September from 41% the previous quarter.
"Consumer demand may be showing early signs of improvement but these results show sustained pressure on smartphone margins. Apple’s iPhone is defying gravity in the high tier," said CCS Insight analyst Geoff Blaber.
Nokia booked a $1.35 billion hit from its networks unit, citing challenging market conditions, and dragging the reported group result to a loss per share of 0.15 euros compared with expectations of a 0.09 euros per share profit Nokia’s key handset unit performed slightly better than expected in the July-September quarter as consumer demand for mobile devices started to improve in many markets.
Shares in Nokia (NOK) were down 11% to $14.30 in pre-market trading.
JPMorgan Chase delivered its strongest performance since the financial crisis first took hold two years ago, as the company reported earnings on Wednesday that towered above Wall Street’s expectations.
The bank’s quarterly profits were driven largely by a strong performance in its investment banking division.
And while losses continued to climb in the consumer-related parts of its business, executives at the company suggested that they were starting to see signs of stability.
"I give them a big check mark," said Raymond James analyst Anthony Polini. "Credit quality was in line with expectations and their core [earnings] power remains intact."
JPMorgan Chase, the first in a series of big banks due to report this week, said it it earned $3.6 billion during the third quarter, or 82 cents a share.
That was far better than Wall Street was anticipating. Analysts polled by Thomson Reuters expected the company to report a profit of $2.03 billion for the quarter, or 52 cents a share.
Investors cheered the news, sending JPMorgan Chase (JPM, Fortune 500) stock nearly 4% higher in midday trading Wednesday. Shares across the the banking sector followed, as the S&P Banking Index (BIX) gained more than 2% on the news.
Banking vs. credit
Propping up the company’s latest results was JPMorgan’s investment banking business, which has experienced significant growth over the past year given the disappearance of Lehman Brothers last fall and the weakened state of peers like Citigroup (C, Fortune 500).
Profits in the division more than doubled from a year ago in the latest, climbing to $1.9 billion.
Unlike the previous quarter, when equity underwriting fees lifted the division’s results, fixed income provided a big boost this time given the boom in newly issued corporate and government debt.
That rapid shift in business, however, left many analysts wondering just how sustainable the performance of both JPMorgan’s fixed-income and broader investment banking business could be in future quarters.
"I think the easy money has been made there, no question about it," said Bill Fitzpatrick, an analyst at Optique Capital Management, which owns shares of JPMorgan.
Offsetting those numbers, however, were credit concerns, particularly within its consumer-related divisions such as its credit card business.
"While we are seeing some initial signs of consumer credit stability, we are not yet certain that this trend will continue," JPMorgan Chase CEO Jamie Dimon said in a statement.
During the quarter, the company said it added approximately another $2 billion to its consumer credit reserves, which dragged down results both within its mortgage lending and credit card businesses.
Both divisions reported widening losses compared to the second quarter of 2009.
Mike Cavanagh, JPMorgan Chase’s chief financial officer, tempered that view however, noting that there were some encouraging signs such as stabilization of early-stage delinquencies within its credit card portfolio.
He added that the company could be close to the end of adding to its loan loss reserves if the economy continues to stabilize.
Cavanaugh also delivered some encouraging news for shareholders, noting that a dividend hike was a possibility, provided that the U.S. economy doesn’t endure further weakness from here.
Earlier this year, JPMorgan Chase slashed its annual dividend nearly 87% to 20 cents a share to preserve capital. Cavanaugh suggested it may not be long before the board could raise it to 75 cents or $1 a share.
"If we are lucky that could be some time early next year," he said.
Other top-tier financial firms are slated to report their quarterly results later this week, with Citigroup (C, Fortune 500) slated to report its results Thursday while Bank of America (BAC, Fortune 500) is due up Friday.
Here’s another sign of a sickly banking sector: a flurry of letters urging banks to raise money — and fast.
Federal bank watchdogs issued 29 so-called prompt corrective action letters for the year through August. That’s up from just seven over the same period a year ago, according to data tracker SNL Financial.
A prompt corrective action letter comes when regulators determine a bank has become undercapitalized, meaning it doesn’t have a big enough cushion against future losses. The directives typically give banks as long as a month to bulk up, usually through issuing more shares.
In addition, officials have filed broader actions against hundreds of banks, covering issues ranging from capital and management deficiencies to risk management. All told, actions against institutions more than doubled in the first eight months of 2009, to 347, according to SNL.
Regulators have been pressing banks to straighten out their problems at a time when they are struggling under the weight of home-lending losses and bracing for a commercial real estate downturn. This year has brought 98 bank failures, with many more expected.
"There is an awful lot of softness on bank balance sheets," said Hal Reichwald, a banking lawyer at Manatt Phelps & Phillips in Los Angeles. "There’s real concern about problems coming down the road and how much it will take to deal with them."
The number of banks deemed troubled by the Federal Deposit Insurance Corp. hit 416 in the quarter ended June 30, a 15-year high and nearly four times the number a year ago. The FDIC doesn’t name the banks on its list or comment on open institutions, because doing so could spark damaging deposit runs.
Meanwhile, the federal deposit insurance fund has been dwindling. Member banks pay into the fund to protect account holders with balances up to $250,000. The FDIC said recently the fund has a negative balance and could run out of cash by the end of the first quarter next year. Over the past year, the deposit insurance fund balance has dropped to $10 billion from $45 billion.
The FDIC said recently that it expects expenses tied to failed banks to surge to $100 billion over five years — up 43% from the agency’s last estimate in May.
Trouble raising capital
Among the institutions that has come under regulatory scrutiny is FBOP Corp., an Oak Park, Ill., holding company that owns nine banks in Illinois, California, Arizona and Texas.
Owner Michael Kelly has built the firm over nearly three decades. Starting in 1981 with one bank — First Bank of Oak Park, from which the firm takes its name — Kelly built the company through acquisitions into the 46th biggest bank holding company in the U.S., according to Federal Reserve data, with more than $18 billion in assets.
But FBOP was hit hard in September 2008 when Treasury took over Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), the government-sponsored mortgage investors. Treasury’s decision to wipe out those firms’ preferred stock left numerous banks and insurers nursing losses. FBOP has also been hurt by its longtime focus on commercial real estate. FBOP posted a loss of $708 million for 2008.
By the end of June, FBOP’s resources had dwindled so low that the firm ranked below 98% of similar bank holding companies in terms of tier 1 leverage ratio, a measure of bank capital.
In August, FBOP signed a so-called written agreement with the Fed that gave it a schedule to raise capital, improve risk management and reduce its concentration of commercial real estate loans. The bank was to submit a capital plan within 30 days.
But raising capital isn’t easy when banks have taken big losses and are looking at more of the same ahead, and FBOP hasn’t made any announcement on the status of its planned capital raise. The company didn’t return a call seeking comment.
Most banks that go on the FDIC problem list or are subject of enforcement actions survive — though two-thirds of the banks that have received prompt corrective actions this year have already failed.
But in numerous instances over the past year, regulators — facing deteriorating fundamentals at banks in a weak economy — have stepped in earlier than they might have planned.
Take, for instance, Irwin Financial, a holding company that owned two banks in Ohio and Kentucky.
It agreed Sept. 11 to a so-called cease-and-desist order from the Federal Reserve, which called for it to boost its capital by the end of the month.
A week later, regulators closed Irwin’s banks — at a cost of $850 million to the deposit insurance fund.
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