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Bank profits tied to stock trades, not core loan business

NEW YORK — The big banks are showing they can still make money, even as Main Street struggles — though not from lending, refinancing homes or other bread-and-butter business.

Instead, they're doing what Wall Street does best — betting big on stocks, bonds, commodities and other assets.

Citigroup, the shakiest of the major banks during the financial crisis, reported Thursday it eked out a quarterly profit from trading, despite suffering more losses on consumer loans. Trading also drove big profits at Goldman Sachs and JPMorgan Chase.

That some banks are making money now is a sign of remarkable recovery from the crisis a year ago. But the lopsided business model raises questions about what happens if trading profits fall off and banks are left to rely on more traditional operations.

"The good news is that banks are in better shape. The bad news is that they're not making loans to consumers and businesses," market analyst Edward Yardeni said. "That could come back to bite them because these trading gains will only last so long."

For now, trading is pretty much the only way banks can make money. And it's more lucrative because there are fewer competitors, interest rates are near zero and government subsidies have allowed banks to borrow cheaply and invest in assets that offer the highest returns.

Goldman Sachs Group has benefited more than most. Famed for its trading prowess, the New York investment bank said Thursday that third-quarter earnings swelled to $3.03 billion, more than triple what it made a year ago.

Goldman's strong showing came a day after JPMorgan Chase reported its own big profits — $3.59 billion for the quarter. That was even more impressive because, unlike Goldman, JPMorgan has suffered heavy losses on consumer loans like credit cards and mortgages.

Citigroup, meanwhile, offered a grim reminder of just how shaky the economy remains.

Helped by trading gains, Citi reported a $101 million profit in the third quarter. But including the $288 million the bank paid out in preferred stock dividends, plus the deal that gave the government a 34 percent stake in the bank, it lost $3.24 billion.

The bank, one of the hardest hit during the recession, said loan losses during the quarter came to $8 billion, a sign that people are still defaulting in large numbers.

Experts don't expect the job market to pick up any time soon, meaning banks could be relying on trading gains for the foreseeable future. While the economy may be out of recession, the unemployment rate isn't expected to peak until the middle of next year.

For now, most big banks "are holding their breath to see what 2010 will mean for retail profits," said Brad Hintz, investment banking analyst at Sanford C. Bernstein & Co. "Will unemployment come down? Will the consumer start spending? No one knows."

Bank profits tied to stock trades, not core loan business 10/15/09 [Last modified: Thursday, October 15, 2009 9:27pm]
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