More Bad News for Financial Institutions

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Mike Larson takes a closer look at the declining second quarter earnings of both big and small financial institutions. In this issue of Money and Markets, Mr. Larson discusses how although there is bad news for financial institutions, finance and real estate companies aren't doing that badly.

Mike Larson takes a closer look at the declining second quarter earnings of both big and small financial institutions. Mr. Larson discusses how although there is bad news for financial institutions, finance and real estate companies aren't doing that badly.

American Express recently reported a 38% year over year plunge in second-quarter profits. Earnings per share of 56 cents were far below the Wall Street consensus of 83 cents. According to the company's CEO Kenneth Chenault, "Consumer spending slowed during the latter part of the quarter and credit indicators deteriorated beyond our expectations. The scope of the economic fallout was evident even among our longer term, superprime cardmembers."

Megabank Wachovia recently recorded a loss of $8.9 billion, or $4.20 per share, in the second quarter. Analysts were looking for a loss of just 78 cents per share. The bank said it plans to slash almost 11,000 jobs. It also cut its quarterly dividend down 87% to just 5 cents a share.

Even the smaller regional banks are seeing more bad news. Regions Financial turned in a 55% drop in profit. Fifth Third of Cincinnati lost $202 million, a huge swing from 2007, when it generated $376 million in net income. KeyCorp of Cleveland did much worse. Its quarterly loss: $1.13 billion versus the income in 2007of $334 million.

Despite the news, shares of finance and real estate companies haven't been doing that badly. In fact, they've been surging. Wachovia was up as much as 148% from its recent intraday low to intraday high. Bank of America surged 86%, while JPMorgan Chase gained 47%.

According to Larson, investors are ignoring all the bad news for a few different reasons. They figure that the Fannie Mae and Freddie Mac rescue program being put into place will be enough to backstop those firms. The Treasury Department is getting authority to extend an unlimited amount of credit to the two Government Sponsored Enterprises, and to buy an unspecified amount of their shares.

Some of the banks that have reported earnings have said they don't need to raise capital immediately. Many have opted instead to sell off assets. Merrill Lynch unloaded its stake in the Bloomberg news service for $4.43 billion, for instance, while SunTrust Banks is liquidating 40 million shares of Coca-Cola.

"A housing support bill is finally making it into law. The bill has several provisions, including a tax credit of as much as $7,500 for first-time home buyers and a property tax deduction for certain homeowners. It will also authorize a mortgage program that requires lenders to recognize some losses on their existing loans, but that gives them an out by allowing them to then be paid off with new, lower-balance loans backed by the Federal Housing Administration," Larson states.

To read this issue online, please visit:

About Mike Larson and Money and Markets

Mike Larson joined the company in 2001, and has more than 10 years of experience researching and writing about personal finance, investing, and the housing and mortgage industry. In 2003, Mr. Larson was named associate editor of the company's monthly Safe Money Report. In this role, he is responsible for writing and editing as well as analyzing trading opportunities for clients. Mr. Larson is also a regular contributor to the company's daily e-letter, Money and Markets.

Before joining Weiss Research, Mr. Larson was a personal finance reporter for, where he wrote extensively on mortgage lending, banking, residential real estate, and Federal Reserve Board policy. His responsibilities included analyzing economic data and interest rate trends for a weekly column and developing rate forecasts for a regular index feature. Previously, Mr. Larson held positions at Bloomberg News and the Boston Herald.

Recognized as an interest rate and mortgage market expert, Mr. Larson's views have been quoted in the Washington Post, Chicago Tribune, Dow Jones Newswires, Reuters, Sun-Sentinel and the Palm Beach Post. He has also appeared as an investment expert to discuss the housing market on CNBC, CNN, and Bloomberg Television. His writing has been acknowledged by both the National Association of Real Estate Editors and the Massachusetts Press Association.

Among the first analysts to call the housing slide, Mr. Larson's new policy paper, "How Federal Regulators, Lenders and Wall Street Created America's Housing Crisis: Nine Proposals for a Long-Term Recovery" has received broad media coverage following its July 2007 submission to the Federal Reserve and FDIC. Mr. Larson holds B.A. and B.S. degrees from Boston University.

Money and Markets ( is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit


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