Are the Big Banks' Earnings a Reason to Celebrate or For Outrage?
ROMANS: So, Ali, there I am Friday with a big old Citigroup earnings report and you know they reported a loss and they also reported a profit.</s>VELSHI: I'm glad it was you handling it in the morning because I was reading that report thinking, wow, what is this? I mean this a week that we have seen a lot of earnings on Wall Street, and a lot of people sort of glazed over it and you might be doing it right now, so why do I care about earnings? Earnings matter because if you want to get rich you often have to invest in the stock market through your 401(k), your IRA or your mutual fund and whatever you want and the earnings on the report card of how these companies are doing so it is really your only time to check in on them to see how they are actually doing.</s>ROMANS: Some of these banks you're not only a shareholder. You owe the bank. Citibank has been sustained by three big infusions from the United States government.</s>VELSHI: So I really don't quite understand when you see earnings from a bank, because they've had this government assistance what is actually real.</s>ROMANS: Are they healthy or are they not healthy? Do they need our money, or do they not need our money? Are they going to pay it back? We don't know.</s>VELSHI: Was it profitable or wasn't it profitable? I don't know. This is very complicated and that's why we have other people to come and join us to help make things clearer for us. Two friends of our program, Diane Swonk is the chief economist at Mesereau Financial in Chicago. Peter Morici is with the University of Maryland School of Business. Welcome to both of you.</s>ROMANS: You know Diane; you were in banking for a long time. You worked at a bank you know the banking industry. Are the banks in better health, is that the bottom line? The banks are doing better?</s>DIANE SWONK, CHIEF ECONOMIST, MESEREAU FINANCIAL: I actually worked directly for Jamie Dimon for four years so I've been right in the middle of this, so you do make money in banking when you have the kind of spreads you've got out there, but the Wells Fargo's of the world, we're going to see their actual earnings next week and I think they really truly are doing well. That said, you know, given the support these banks have had, even Goldman Sachs raising the private capital to pay back the TARP Funds, they're getting more money in FDIC-guaranteed loans than they are actually getting the TARP funds. So they're still getting an awful lot of subsidy from the U.S. government so to call them healthy at this stage of the game, is more than premature.</s>ROMANS: You worked for Jamie Dimon; of course he is the CEO right now of JPMorgan Chase. He so famously this week said, he called it what?</s>VELSHI: He said having TARP money is like a Scarlet letter.</s>ROMANS: He doesn't want this money. He doesn't want this money and of course they haven't given it back yet because it has to be an orderly process to give this money back. Do you think he's right to give the money back and they can or would that be good or would you then be able to zero in on other banks that aren't giving it back and then the market starts to take them down?</s>SWONK: There's a real rub. Initially they told these bankers here everybody take it so we don't know which banks, which everyone does no know which banks are doing so poorly so we don't have runs on banks.</s>VELSHI: Peter, what do think of the whole situation?</s>PETER MORICI, UNIVERSITY OF MARYLAND SCHOOL OF BUSINESS: Well I think it's a bit of a game that Jamie Dimon's playing, but if I were in his shoes I'd play the game as well. They have people thinking if they give the TARP money back, then they are not taking public money so they can pay people what ever they like and run the banks as they please. The reality is we're still guaranteeing these banks and they're borrowing lots of money from the federal government and the Federal Reserve in other ways and that's given them big spreads to make lots of money.</s>VELSHI: When you say big spreads let's just clear this up, it's the oldest -- not the oldest profession in the world, but it is one of them.</s>ROMANS: It might be.</s>SWONK: I don't want to go there.</s>VELSHI: You have money at a certain rate and you loan it out at a higher rate and you make the money.</s>ROMANS: The point is that the government would dive in there, right, Peter? And make this cheap money available.</s>MORICI: Basically, banks borrow at three and lend at five and right now they're getting to borrow at two and lend at five. The government has opened up the spreads by giving them access to very cheap money through the FDIC and through the Federal Reserve. Remember, Ben Bernanke is lending the banks almost a trillion dollars against questionable paper. So for Mr. Dimon to say hey, we don't have TARP money we can pay ourselves what we please again because we're not taking government money, is Mr. Dimon going to tell me he's not using any of those special facilities at the Federal Reserve? Hardly. Once more, if these guys go off and do as they please again and get in trouble again we're going to have to bail them out again. No, let them pay off the TARP money, but let's not let them think that we should not look at how they're running these institutions because they've gotten us into a terrible mess with their business practices.</s>ROMANS: You know Diane, so many people look at these earnings and they are like wait, if the banks are doing a little better then did they need our money or are they doing better because they have our money? It's very difficult because it's such a hot button. People really care about what the banks are doing.</s>SWONK: Well, I think the important issue is we need to have banks doing better to have them eventually lend more aggressively and fill this huge gap, the shadow banking system that GMACs that didn't used to be banks were larger in mortgage lending than actual banks so we do need to see this last part of the lending market back in shape again because they're going to have to fill in an enormous gap that we have created in credit markets. That said, they have to get healthy and they have to get profitable and, yeah, we have to help them do that because it's not in our best interest to have all these banks go down. On the flip side of it, they're getting subsidies and Peter is absolutely right. And I think the TARP funds and all the political strings that came attached to it really tainted the idea that it really doesn't, you know, it's gotten us into more of a mess and it really illustrates how difficult it is once we start getting this deep into any business, you know, the kind that what we expect as shareholders and we're big shareholders in these banks and what we expect in terms of their response.</s>VELSHI: Peter listen to this quote from President Obama that he made during his speech. Take a listen.</s>OBAMA: The truth is that a dollar of capital in a bank can actually result in $8 or $10 of loans to families and businesses. So that's a multiplier effect that can ultimately lead to a faster pace of economic growth.</s>VELSHI: Peter, good explainer, but it does sound like the president is setting the stage for the fact that this government may need to intervene further into the banks to ensure that they're properly capitalized. How do you read what he's saying and what do you think about it?</s>MORICI: Well, I think that he's basically trying to justify the fact that the federal government has put capital into the banks to shore up their position and he's trying to justify all the assistance that we've provided them, but what he's not doing is a terribly good job of explaining how they got into this mess and what he's going to do to keep them from doing it again. And most major economic downturns, the long recession that began in 1876 and lasted until 1901, the great depression and now this mess, was caused by bank meltdowns and bad banking practices.</s>ROMANS: 1806, now you're bringing me down. Let's not talk about ...</s>MORICI: I'm a professor, remember.</s>ROMANS: Oh yes you are Peter. Peter Morici, professor, University of Maryland School of Business. You're right. Thanks so much. Diane Swonk, chief economist of Mesereau financial, we can talk to you for hours, but unfortunately we don't have hours. Thanks you guys. Have a great weekend.</s>VELSHI: Procrastinators like me, listen up. The April 15th deadline is past. It is over, it is in the past. Some of us missed the deadline for filing, I did file an extension because I watched the show and that's what it said to do. If you missed the deadline for filing, you need a plan. If you didn't file for an extension or even if you did you need a plan and you need one now and we're going give it to you.