Illusionary Profits

When I heard of strong earnings released by Goldman Sachs last week, I had to shake my head in disbelief wondering if anybody saw through the charade of bank earnings.

Apparently others saw it too, as the WSJ featured in “The Bank Profits That Weren’t:”

Most investors and analysts saw through the first wave of bank earnings for what they were – pretty poor quarters. Bank of America and Citigroup would have posted billions in losses had they not booked gains from asset sales and Goldman Sachs Group made its trading gains in a market void of real competition.

Tuesday’s Writing on the Wall column in MarketWatch takes a look at the artificial means the financial industry used to make the second quarter look better than it really was.

“It’s hard not to be skeptical after the financial community made the choices it did last week. Rather than come clean with the brutal truth that the banking business stinks and the investment banking business isn’t much better, the biggest firms chose to obfuscate, be dim, mislead and camouflage what in reality was the kind of crummy quarter one would expect in the middle of the worst recession since World War II.”

Here’s how:

“Wall Street’s best client was Uncle Sam. Forget the government-mandated business. Washington continues to keep the financial system afloat with $242 billion in commercial paper guarantees, $1 trillion committed to the Term Asset-Backed Secured Loan Facility, $455 billion committed through the Term Auction Facility and billions more in other programs.

Even with the government greasing the gears, the nation’s two biggest banks, B. of A. and Citi, still would have shown billions in losses had they not sold a combined $16 billion in pre-tax assets, and these are banks that have taken a combined $102 billion in taxpayer cash.”

The column underscores a point made by the WSJ’s Dan Fitzpatrick and David Enrich on Monday that not only was business tough for banks in the second quarter, the chief executives of those firms believe the second half of the year will be worse. One problem, according to a story Monday by Lingling Wei and Maurice Tammen, is commercial loans that are defaulting at the fastest rate in two decades.

There is Wall Street reality and then there is Main Street reality. Sooner or later the two will clash, most likely in favor of Main Street reality. Wall Street will have to adjust its lofty views and come face to face with how things really are.

While you and I will have no control if and when this event is this taking place, there is one thing we all can do: Keep our sell stops in place and act when they are triggered.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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