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Fat Banks Have It Made In The Shade

|Includes: BAC, JPMorgan Chase & Co. (JPM), WFC

Since early last year the major banks have had it made in the shade. What other business can you make money without taking on any risk? Ever since the financial crisis last year the major banks such as J.P. Morgan (NYSE:JPM), Wells Fargo (NYSE: WFC), and Bank of America (NYSE: BAC) have been able to borrow from the Federal Reserve Bank at nearly zero percent. However, they are not lending any money. So one may ask how are they making any money if they are not making loans? The answer is that they are buying U.S. Treasuries.

This is the greatest profit scheme ever devised. It is actually a genius idea when you stop and think about it. The major banks borrow at zero percent from the Federal Reserve Bank and buy U.S. Treasuries. So they are actually lending to the U.S. government. They are getting between 3.00-5.00 percent yield on longer term maturities. Why would they make a loan to an individual or small business and take on that risk of default. When you buy treasuries you are guaranteed to get paid because the tax payer will just get taxed more if need be.

Unemployment in the U.S. is at ten percent according to government standards. Some say the actual number is much higher around 17 percent. The housing crisis is still a major detriment. Even the recent government program that modifies home mortgages for homeowners that can't afford to pay their loans are defaulting. It is reported that 42 percent of the modified loans are in default. The government spending is spiraling out of control with different stimulus programs, and countless attempts to prop the housing and auto markets. Let's not even get into the health care debate. Where is this money coming from? Who is going to pay it back?

Now when you really think about it, the banks have it made in the shade. There is much less competition as the remaining banks have swallowed many broker dealers and banks like Bear Stearns, and Merrill Lynch, Wachovia, Washington Mutual, and Countrywide Financial to name a few for pennies on the dollar. Instead of being to big to fail, they have now become really to FAT to fail. All this takes place when the smaller regional banks seem to fail every week on a Friday afternoon. It must be nice to have it made in the shade.

Nicholas Santiago,
Chief Market Strategist