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Putting banks' operating profit announcements in perspective



March 25, 2009 – Comments (0) | RELATED TICKERS: C

It's funny, everyone in the media and on the street is getting so excited about the fact that many banks, including Citigroup, have come out recently and said that they reported an operating profit during the first two months of the year.  Of course they were profitable over the past two months!  The operating environment for banks has rarely been as profitable as it is right now after the all of the action that the Fed has taken.  That still doesn't mean that banks are in good shape.  Ignoring the past sins that banks still carry on their balance sheets is like giving a metal to a serial killer who decides to help a little old lady across the street.

I came across a hilarious quote from fund manager John Hussman on banks' recent announcements:

The excitement of investors last week about Citigroup posting an operating profit in the first two months of the year simply indicates that investors may not fully understand the term "operating profit." Citigroup could burst into flames while Vikram Pandit sells lemonade in the parking lot, and Citi would still post an operating profit. Operating profits exclude what happens on the balance sheet.

It goes without saying that any banks' balance sheets are a complete mess.  The million dollar question is whether Geithner's new plan will be able to help banks clear this junk off of their books.  I have absolutely no idea.  The government certainly is chucking a lot of money at the problem, but in order for the plan to work banks have to be willing to sell their assets at a price that's significantly below what most currently have these assets marked at on their books or investors have to be willing to pay more for these items than they were willing to before this plan was announced.  Perhaps the cheap financing and assumption of losses will be enough to entice investors to pay more than they wanted to for these "assets." 

I don't know what will happen, but it will be fascinating to watch...not necessarily in a good way but more in a "Hey that lion is tearing apart a zebra.  That's disgusting, but I can't look away." sort of way.


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