- Credit crisis
Lower profit generations are resulting in continuous losses leading to massive credit crisis for six of the largest U.S. regional banks; as a result, a total of 14% of the employees are facing a threat for losing their jobs. Despite their efforts to double their reserves to compensate for the losses they faced on the loan grounds, the net charge-offs have soared to newer heights, quite a few times more than last year resulting in deteriorating credit. However, Mr. Henry Paulson’s (Secretary, U.S. Treasury) steps for infusing capital worth $250 billion (as a part of his $700 billion Troubled Asset Relief Program) into the nation’s banks stays the only hope.
Edward Hemmelgarn (President, Shaker Investments, Cleveland) commented – “This is what happens in a recession, especially one driven by financials and the consumer. Everything always looks gloomiest as banks try to stay ahead of the curve.” But he also added that capitals present with many banks are not as bad as being portrayed.
Those in distress are seeking aid worth anything between $1.1 billion to $3.5 billion, as reported by Andrew Cecere (Chief Financial Officer, U.S. Bancorp). According to him – “Changes with regard to capital availability and tax changes potentially makes a merger transaction financially more attractive.”
- Effects of recession
The first is definitely a decline in the profit margins. U.S. Bancorp suffered a loss of 32 cents for every share, which is, 47 percent. However, this is on the greener side since investors and depositors are now avoiding the weaker rivals. For others, the profit margins nose-dived between 54% and 80%.
The next effect is definitely a build-up of personal debts due to decreased income that can bring forth other deteriorating effects such as break-ups in families, an increased number of school and college dropouts, an increased number of people going for substance abuse and ofcourse, an economic dependency. The debts surmount mostly through credit cards; with inflation being the other side of recession, expenses may run wild further pressurizing income. As a result, people start exhausting their savings driving them more into the realms of poverty.
- Profit Fall Analysis
What was a $19 million loss in 2007 jumped to $729 million in 2008 for the Cleveland-based National City, but this excludes the dividend for this year April’s $7 billion rising of capitals. Overall, the shares suffered a loss of 85 cents on each. But the loss of deposits in September because of the market turmoil has been given a positive feedback from the Chief Executive Peter Raskind, who commented things to become the worst before getting better.
For others, net loss went as high as $81 million (i.e. loss of 14 cents from 61 cents for every share) from the $325 million profit last year. KeyCorp, Cleveland; however, reported of a loss of $36 million with probably the least of losses per share amounting to 10 cents from 57 cents. Definitely, it is the result of the most severe financial crisis according to even the most experienced banking veterans.