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Commercial Lending Still a Problem – RF, USB, GS


The opposition of Wall Street v. Main Street doesn’t get put into any sharper focus than on a day like today. Early this morning, Wall Street titan Goldman Sachs & Co. (GS) reported net income of $3.3 billion and EPS of $5.59 on revenue of $12.78 billion for the first quarter. Only the previous quarter, when the bank earned a record $4.79 billion, was any better.

Over on Main Street, meanwhile, Regions Financial Corp. (RF) posted an EPS loss of -$0.21. Another regional bank, U.S. Bancorp (USB) also reported earnings this morning, and did much better. U.S. Bancorp reported diluted EPS of $0.34 on revenue of $4.3 billion.

Regions Financial posted pre-tax pre-provision net revenue of $413 million, barely half as much as the year ago quarter. The bank took an allowance for credit losses totalling $770 million, an improvement from the $1.18 billion provision it took in the previous quarter.

If one were to back out Goldman’s proprietary trading operation, the bank’s revenues for the quarter fall by $10.25 billion, to $2.53 billion, half that of U.S. Bancorp, which has no proprietary trading desk at all. As a traditional investment bank, Goldman is human-sized again.

The disparity between the reported results of Wall Street and Main Steet points out the different recovery rates of the US economy. Wall Street’s recovery is definitely V-shaped, driven primarily by proprietary trading, the very activity that contributed heavily to the economic crash to begin with. On Main Street, which did not take too large a hit at the beginning of the crash, the collapse of residential real estate prices has now found a new home in the commercial real estate loans that are the bread and butter of small and regional banks.

The return of huge profits from proprietary trading reflects nothing so much as a return to the belief that no matter how much risk a Goldman Sachs takes on, the federal government implicitly guarantees that risk because the government has proven on more than one occasion that a systemically critical bank like Goldman will not be allowed to fail. It is impossible to say the same thing about a Regions Financial or a U.S. Bancorp.

The Obama administration’s attempts to reform the US financial system does very little to address this inequity. The FDIC insures depositors in regional banks against a bank failure, but the bank and its shareholders are left with nothing.

For the ‘too big to fail’ banks, the bank’s continued existence is guaranteed, its management isn’t replaced, and life goes on. If one is unlucky enough to have bought some derivative instrument that failed, well, that’s not the bank’s fault. The buyer should have known better or read the prospectus more carefully or put his money under a mattress.

There are still a few rough quarters ahead for Regions, and other regional banks of its size. Credit losses will continue and the banks are just going to have to tough it out. 

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