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Banks' credit crisis over? Not so fast, CEOs

Bank CEOs missed the mark in forecasting the destructive path of today's credit crisis. That's why we shouldn't take too seriously their predictions that it is almost over.

Some of Wall Street's biggest names have been proclaiming in recent weeks that the worst of the financial market turmoil is likely done. JPMorgan Chase's Jamie Dimon thinks it is "maybe 75 percent to 80 percent over," while Goldman Sachs' Lloyd Blankfein says "we're closer to the end than the beginning."

Those kind of comments helped put a positive spin on what otherwise would have been a tough earnings season for financial companies, which have tallied huge losses as mortgage and other debt woes continued to weigh on their businesses.

It's in the CEOs' best interests to steer sentiment higher. If people feel better about the state of the economy or financial markets, that will lead to more deals or stock trading and will boost bank profits.

The data don't back up their happy views, however. We're stuck in a housing downturn, mortgage defaults continue to soar and inflation is hurting businesses and consumers.

Credit-risk worries, which have ravaged financial markets since last summer, haven't diminished. The gap between the interest rate on the three-month Treasury bills and the three-month London Interbank Offered Rate — referred to as the closely watched "TED" spread — has been widening, indicating that lenders are avoiding risk.

The credit crisis has led to more than $200-billion in write-downs taken by banks and financial firms over the past year — far more than anyone had expected, given the optimism of those companies' CEOs last summer.

In June, Bear Stearns CFO Sam Molinaro talked about how the high level of subprime mortgage defaults hadn't "spilled" into other areas of the market. Merrill Lynch CEO Stan O'Neal said the subprime crisis was "reasonably well contained."

And in July Citigroup's CEO Chuck Prince said: "When the music stops in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing."

All those executives are out of work.

By August, risk aversion spread through the marketplace, and has since paralyzed credit markets and caused a tightening of lending standards.

That's why we might want to listen cautiously to what the bank CEOs are saying. Richard Fuld, CEO of Lehman Brothers, commented at the company's annual meeting that the worst is "behind us." Morgan Stanley CEO John Mack told investors that the collapse of the U.S. subprime market has reached its eighth inning or maybe the "top of the ninth."

Weighing against that are findings of a new CEO survey from the Financial Services Forum, which represents 20 of the largest U.S. financial companies. The survey showed that executives by a wide margin believed the credit turmoil has far to go; one in three of those CEOs polled put the likelihood of a recession at 100 percent.

Among the trade group's members is Merrill Lynch CEO John Thain, who reported on Thursday that the investment bank had a $2.14-billion first-quarter loss and write-downs of $6.5-billion on its debt including mortgage-related securities and leveraged loans.

"I hope those who say we are at the end are correct. I am somewhat more skeptical," Thain told the Financial Times.

Last summer, Bank of America's Ken Lewis seemed confident that the end was nearing for the housing slump. On Monday, the Charlotte, N.C., bank said its profits tumbled 77 percent in the first quarter because of trading losses and a $3.3-billion increase in reserves for problem loans.

Forget about ninth, or even eighth inning. Maybe we haven't even gotten to the seventh inning stretch.

Banks' credit crisis over? Not so fast, CEOs 04/23/08 [Last modified: Thursday, October 28, 2010 11:53am]
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