Rate Cut & Benefits of Credit Unions & Bank That Will Be Around

Okay, so I was early on the global rate cut, by a day. Notice that it did not help? The Fed is firing bullets into the darkness now. This won't be the last domestic cut...I can see them easing again at the end of this month.

Almost every call I take at some point winds around to..."So are you guys going to be around?"

I work for a credit union. Realize that the business model of a credit union is different than that of a bank. Most banks, have to make a profit for their stockholders. They make big bets to make more money (traditionally) so that they can maintain a reasonable level of profitability. Asset classes are falling and if a bank have to raise capital in a market where capital is not available(see yesterdays post)...well we've seen how that ends (think IndyMac, WaMu, and Wachovia). Credit Unions are there for the shareholders, those who actually have their money on deposit with the credit union. It is much more simple business. Credit Unions do not take the same risks for banks. The very nature of the credit union and who it serves, makes the relatively safer bet than some banks.

So, do I think my credit union will make it through this. Absolutely. The only thing that I can see tripping up where I work is large job losses in our area. I don't think it is too big of an issue as my credit union services teachers and medical professionals for the most part. It is a pretty safe bet those jobs aren't going anywhere. But you never know.

As for banks, if you're not at Bank of America (BAC) by the way...no one can be surprised by their price dive. They BOUGHT COUNTRYWIDE and MERRILL LYNCH, Wells Fargo (WFC) which is the only one of these names that I would consider adding (which I'm not)and THEY BOUGHT WACHOVIA (but I bet you they end up with the GOOD part of Wachovia). Or JPMORGAN Chase (JPM), which has purchased BEAR STERNS and WAMU. And maybe Citi...but they have their own problems. I think they fought so hard to get their piece of Wachovia to be in the "too big to fail" category.

Outside that fantastic four, I can't see who will still be around. You are going to have smaller players that will remain because they were much smaller players and didn't go whole hog on the mortgage orgy at the turn of the century.

Bank America's Secret Is Out

I was wrong about JP Morgan Chase...I thought they were going to post numbers similar to what Bank of America posted today. But what I missed is that JP Morgan Chase was fantastic at spreading it's bets so that when the the sky came falling in mortgages that the bank was able to post a profit and bet the number game called "earnings season".

Bank of America and Washington Mutual...not so much. Both banks got slammed today when earnings fell well shy of estimates. In fact, the quarter was so bad for BAC that income from the firm's investment fell 93% year over year. Quarterly profit was down 32% overall.

Wa-Mu reported with much the same results. The company earned $210 million vs $748 million a year earlier.

This leads me to question that I have been asking for over a month....Why did these banks not release significant earnings warnings prior to reporting. Neither Bank of America or Washington Mutual were really close to the analysts expectations. Why not lower them earlier and avoid shocking the market even more?

And this will not be the last quarter these banks are going to struggle. Raising provisions for loan losses is inevitable in this enviroment but we haven't even reached 2008 yet when an estimated 2 million more loans will reset. These provisions for losses will increase.

And notice that Citi, Bank of America, and Wa-Mu all state something along the lines of, "We knew we had a tough quarter, but we are disappointed with the results." Really? No kidding huh? And also notice that none of them give any meaningful guidance for quarters to come. Why? Either A) they have no idea what is going to happen and are hoping for the best or B) They are hiding even more losses/secrets and are hoping rate cuts and other help from the government will make things all better.

Of course, making the Ultra $100 Billion Bank Bailout Fund lets you know the answer. When the banking industry comes together and make a fund to help ease the credit crunch...there can only be one explanation. There are some large potential losses out there and this fund will help mitigate the pain. It will allow the banks to control the sale of assets instead of just dumping them on the market to be priced accordingly. This way they still have the pricing power or price determining power for their "assets". While maybe this will help overall. It does not bode well for what is hiding on the big banks balance sheets.