Awakening to an 'erosion of capital'

Traders signal offers in the Standard & Poor's 500 stock index futures pit at the CME Group in Chicago, Ill., after the Federal Reserve announced plans to stimulate the economy.

TEXT OF INTERVIEW

Steve Chiotakis: All right, let's talk to Jane D'Arista, an analyst with the Financial Markets Center. Jane, good morning.

Jane D'Arista: I think that the financial sector is now getting used to the idea that mergers are out there. Moreover, I suspect that the investment banks, the ones that remain as well as Merrill Lynch with B of A, are trying to get back into their business of arranging these, to get the fees, to get the profits coming again, and they're succeeding.

Chiotakis: So let's talk about Bank of America, then, and B of A of course reporting this morning that their profits more than doubled in the first quarter. What's going on there?

D'Arista: The banks themselves have perceived, and I think the market is beginning to perceive, that the government is very concerned about their capital position -- has finally awakened to the fact that we were having an erosion of capital through the toxic assets and through the derivatives, the calls for collateral, et cetera, which was going to wipe out the system if they didn't do something. Well one of the things that they have done was to get Congress to agree to pay interest on reserve accounts. And so what we saw was last September, reserves with the Federal Reserve bank was $57 billion, they peaked at $900 billion in January. This means the banks have collateral that is good as gold. It is an asset on the asset side of their bank which earns money on the one hand, and on the other hand can be traded, can be used as collateral, et cetera. And it does not require a charge against capital, because nobody's going to question that collateral.

Chiotakis: All right. Jane D'Arista, an analyst with the Financial Markets Center. Jane, thank you.

D'Arista: You're very welcome.

About the author

Steve Chiotakis was the host of Marketplace Morning Report until January 2012.

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