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Banks shrink and turn profits

Heidi Moore Jan 19, 2012

Kai Ryssdal: Today brought to a close what we in business journalism refer to as bank earnings season. The last two of the big Wall Street banks reported profits today. That’d be Bank of America and Morgan Stanley. B of A did all right — actually made money in the fourth quarter instead of losing like they did a year ago. Morgan Stanley did lose. And that’s been closer to the general tone all week. 2011 was not especially kind to big banks.

Our New York bureau chief Heidi Moore is here to give us some context. Hey Heidi.

Heidi Moore: Hey Kai.

Ryssdal: So what have the numbers this morning taught us? What do we know?

Moore: Well, what’s interesting is that the big U.S. banks are far less profitable. In fact, they’re even shrinking a little.

Ryssdal: You have to explain that ’cause — “too big to fail,” all that stuff, right?

Moore: Yes, and fear not that term shall not be leaving us anytime soon. But if you look at what the banks were communicating, it was that 2011 was the year when they got smaller. So Bank of America is getting out some regions of America. It sold $33 billion of assets that it had. Citigroup is also selling down a lot of that toxic debt that was weighing it down. It also sold a student loan business, a brokerage in Japan. Goldman and Morgan Stanley are talking about things like rightsizing again too. They’re cutting staff and cash bonuses. And so the overall trend is that we’re seeing these big behemoth actually take the responsibility to get smaller.

Ryssdal: What gives? Why though? You know, corporate altruism is great, however comma…

Moore: Yes, altruism is a word that has no place in capitalism. Your skepticism is well-based. What’s going on is that — you remember how the market was punishing Bank of America stock, dragging it down to $5, even below that? It did it to Citi, to Goldman Sachs, to JP Morgan — all of them. And the banks react to that, right? When you hit their profitability, when the shareholder speaks, they react faster. So you’ve had regulators — for two years — saying, “You’re too big to fail. You have to get smaller.” And the market speaks in one year and gets it done a lot faster.

Ryssdal: Is there still though — I joked about it before — their still really really big as in too-big-to-fail big.

Moore: Yes, this is just the beginning of the process. In fact, I think the bigger issue here is: are they “too big” to succeed? For instance, Bank of America has gone from $2.5 trillion in assets to $2.2 trillion in assets. That’s still massive. That’s still a big big number.

Ryssdal: Yeah.

Moore: They lost some ground, JP Morgan is now the biggest bank in the U.S. They are all still very, very big but that trend line of them taking their future in their hands and deciding that they need to be smaller is very very important.

Ryssdal: It sounds — I’m going to ascribe motive — it sounds like you’re saying that’s a good thing.

Moore: It is. And also it is not. It depends on what side of the fence you’re on. For instance, I talked to Fred Cannon at Keefe Bruyette & Woods and he said something about the dualism here that I thought was very smart.

Frederick Cannon: So the real challenge with these shrinking banks is that on the one hand, they’re safer because they have more cash on hand. The bad news though, is they earn less money.

Ryssdal: OK, wait. Quickly before I let you go, what does it mean that it’s bad that they’re making less money?

Moore: Well, it just means that we’re not going to have these billion dollar profits anymore. So if we’re comfortable with small banks, we have to be comfortable with smaller profits.

Ryssdal: And shareholders thus getting rewarded accordingly?

Moore: Exactly.

Ryssdal: Heidi Moore in our New York bureau. Thank you Heidi.

Moore: Thank you Kai.

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