Credit Crisis crush regional bank’s results

  • 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.

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Can the federal Aid save the financial market?

  • Federal Aids Vs Recession fears & corporate profits

The Federal Reserve of the United States of America, together with the governments of the other countries has pumped in the required amounts of money to hoist the financial flags but the launching of bank rescues was not fully effective in eliminating the fears of recession that are still driving down the commodities and the stocks in the U.S. It’s the poor profits generated by the corporate world that is held responsible for not allowing the faith to get restored once again.

The latest program of Washington for helping the financial markets amounts to $540 billion that has been channelized to set up five special purpose vehicles. This shall enable buying certificates of deposits as well as commercial papers from the mutual funds suffering currently because of investors backing out lately.

Henry Paulson (Treasury Secretary) is supporting the idea of the fiscal stimulus program, which inevitably is a proof of the Bush administration accepting the government’s responsibility to bring the economy up. But shall it cover the trouble spots such as Pakistan, Ukraine and Iceland? Since Japan and France has extended the help to banks; now the intervention of IMF is required to set the balance.

Inter-bank costs for lending have dropped again; this is a tentative signal of a renewed confidence in the financial system. With the Treasury buying off all the mortgage loans, there are high chances of the credits crossing the freezing points. Question remains, in which direction and shall it be enough to buffer the difficult months before the conditions improve? Even a resilient economy is not enough to answer that.

  • Role of the federal reserve banks around the world

Speaking on a global basis, the promise is of $3.3 trillion. This shall guarantee the bank deposits and inter-bank lending to surface once more. Lawrence J. White (Professor, Economics, Stern School of Business, New York University) commented on the issue – “With honesty on bank balance sheets and enough government bucks, private investors will come back in. But Government investment should be structured to ensure the government earns a profit if and when the banks’ shares rise.”

Whether or not it shall transform into a reality is debatable, for U.S. stocks though experienced a brief rise, slid back with The Dow Jones Industrial Average closing down 2.5 percent while NASDAQ Composite Index went down by 4 percent more. And the stronger dollar resulted in sending the gold and oil prices about 4 percent lower than the previous counts, while Japanese stocks closed 3.3 percent higher and European shares at around 0.8 percent. Canadian banks have now lowered their rates on prime lending for lowering the funding costs, providing customers lowered rates on an array of loans.