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Within the fluff that was the CitiGroup earnings presentation were two nuggets of what of the banks are really up against. As I’ve been saying for over a year this issue is a consumer driven problem NOT a bank driven problem. The banks just happen to be the primary loser as the consumer collapses. The two charts are credit card and mortgage capital losses. We’re talking about a sharp acceleration in losses here. This effectively confirms that the bank earnings are a total sham. Credit losses are getting worse across the entire spectrum yet these banks are magically raking in profits. I don’t want to imply that the bank earnings are entirely fake (refinancing and lending due to the yield curve were stronger), but we keep seeing the same trend in all of these earnings reports – fixed income trading and other unsustainable profit drivers are the primary sources of revenue. The charts speak for themselves:


The important implication here is that the consumer is not rebounding. 20 years of excess has finally come to a stop. This is exactly what happened in Japan in the 90s. The Fed is now officially pushing on a string and the TALF and PPIP are destined to fail. The banks earnings have the appearance of strength, but don’t be fooled. As long as the consumer continues to keep a tight grip on their wallets banks’ balance sheets will continue to deteriorate (although M2M will allow them to hide much of the losses).

  1. Onlooker

    Yes indeed. All the misdirection about this being just about a loss of consumer confidence and the market to market screaming just don’t acknowledge the basic underlying problem. It’s the debt. It’s finally come home to roost and the house of cards/ponzi scheme is imploding.

    The denial about this point is very strong and deep in this country. We have to face up to it and restructure the debt, acknowledging the losses (bondholders and equity holders), or we’ll not have a strong base from which to grow. Of course, the powerful, politically connected holders of those bonds and stocks want to protect their interests and keep the status quo.

    And now they’ve painted themselves into a corner (the feds). With the banks now declaring big profits they can’t take the measures they should have taken several months ago. Conservatorship/bankruptcy. And the nationalization boogey man makes the politics untenable too.

    So we’ll wait until they implode further when the losses build and they can no longer pretend that they’re solvent.

  2. FDO15

    TPC, you rock. You don’t read this kind of logic anywhere else on the web. Thanks for all your hard work.

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