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Bank Earnings Show Shifting Landscape of Wall Street

Earnings results from two financial giants underscored the new order taking shape on Wall Street, as its strongest banks post huge profits while other once-mighty players continue to strain under losses from souring loans.

A year after dozens of banks accepted billions in taxpayer bailouts to avoid being swept away by the financial crisis, Goldman Sachs and Citigroup on Thursday reported how they had fared over the summer. The earnings also highlighted the political and financial obstacles now facing each bank.

At Citigroup, which is still on government life support, spiraling consumer losses overwhelmed strong trading results. The bank's headline earnings number — net income of $101 million — came before it accounted for $288 million in preferred dividends and a debt exchange that gives Washington 34 percent of earnings.

After including the items, the loss to stockholders was 27 cents a share, or $3.2 billion, compared with a loss of 61 cents a share, or $2.9 billion, in the third quarter a year ago.

Meanwhile, quarterly performance at the banking giant Goldman Sachs cemented its status at the top of the financial heap, alongside JPMorgan Chase. On Wednesday, JPMorgan reported another profitable quarter, igniting a rally in the stock markets.

Goldman, which repaid its $10 billion government bailout in June, reported that trading gains and corporate investments contributed to a $3.19 billion profit in the third quarter. In announcing its results, Goldman promptly went on the defensive about its bonuses, which are being doled out while the unemployment rates chugs toward 10 percent.

"There is a massive divide between Wall Street and Main Street," said the analyst Meredith A. Whitney. "Main Street is suffering while Wall Street is doing great. It's like the Olive Garden is empty while San Pietro is packed," a reference to the posh Italian restaurant in Midtown Manhattan.

In part to allay criticism of its profits and bonuses, Goldman announced a $200 million contribution to its foundation, which promotes education. Goldman also disclosed how much it had set aside for its annual bonus pool. It said that it had earmarked $5.35 billion in compensation and benefits, an increase of 84 percent from the year earlier period, putting it on course for a record payout to its executives by the end of 2009.

During a conference call, Goldman's chief financial officer, David A. Viniar, rejected criticism that the bank's high bonus levels ignored the tougher times experienced by other people elsewhere in the economy.

By paying the bonuses, Mr. Viniar said, Goldman was trying to make a difficult "trade-off" between "being fair to our people who have done a remarkable job" and "also what's going on in the world." "We are very focused on what is going on in the world," he said. "We are focused on the economic climate. We are focused on what is going on with other people."

At Citigroup, the results added to the mounting pressure on the chief executive, Vikram S. Pandit, to turn around the troubled bank, which is one-third owned by taxpayers. Mr. Pandit has been trying to shrink the bank’s balance sheet in the worst financial crisis since the Great Depression.

All the while, he is trying to find a way to repay part the $45 billion in federal aid and get out from under the government's thumb. That has made it crucial for the bank to show investors it had a gain in the quarter, no matter how it eked it out — hence, stressing the $101 million in income from continuing operations. Citigroup’s shares were down 4.8 percent in midmorning trading.

The results came on the coattails of its trading operations, which cranked out good results from its bond and currency businesses. Still, its credit card and mortgage units are hemorrhaging money, contributing to about $9.4 billion in consumer losses. And the bank added another $802 million to its reserves, about half as much as JPMorgan Chase set aside on Wednesday, as it braces for several more quarters of losses. Both banks now have loss reserves of over 5 percent of their loan portfolios.

"This was an important quarter for us; sustainable profitability remains our primary goal in the near term." Mr. Pandit said in a statement. "While consumer credit trends are improving in international markets, the U.S. consumer credit environment remains challenging."

It was another messy quarter for the company. Beyond widely diverging figures between its reported net loss and operating profit stemming from accounting treatment, the bank suffered a $1.7 billion hit to its revenue from an another adjustment, due to the narrowing credit spreads from perceived improvement in those financial stability.

Source: New York Times
Date: 19.10.2009 [234]

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