JIM LEHRER: Next tonight: What’s behind some big profits and big losses for the banks on Wall Street? Jeffrey Brown has that story.
JEFFREY BROWN: In recent days, major banks have reported their third- quarter earnings, and it’s a mixed picture. Several, including Goldman Sachs and J.P. Morgan Chase, reported considerable profits, while others continue to be hurt by loan losses and other problems in the broader economy.
Notable among the latter group is Bank of America, which is also plagued by the continuing fallout from its acquisition of Merrill Lynch late last year.
Joining us for an update is Clayton Rose, a senior lecturer at Harvard Business School.
Well, let’s start with Bank of America. In what ways is it feeling the economy’s continuing problems?
CLAYTON ROSE, Harvard Business School: The primary problem that they have is that their assets, their loans are tied to the consumer.
And, as long as the consumer is both unemployed at a much higher rate than we would all like, and as long as they continue to not purchase things and to shed debt, then firms that have a close tie to their fortunes, like Bank of America, are going to continue to suffer in terms of earnings.
JEFFREY BROWN: And B-of-A is particularly vulnerable in that area?
CLAYTON ROSE: They are. A substantial portion of their assets are related to loans, both mortgages, home-equity loans and credit card loans, that are very tied to the consumer.
JEFFREY BROWN: Now, in the meantime, the banks’ executives and now the lawyers are — are still under something of a cloud over the Merrill acquisition. Tell us what has happened just in the last couple of days.
CLAYTON ROSE: Well, the fundamental issue there, Jeffrey, is that, or the issue at question here is, should Bank of America have disclosed in the fourth quarter of 2008 a year ago that the losses that Merrill was suffering during the fourth quarter were much higher than anticipated, and disclosed that to the shareholders in Bank of America before the vote was taken to formalize the sale of Merrill to Bank of America?
Bank of America chose not to disclose those losses before the vote was taken. And that’s the issue, whether they should have done that and whether there was some either violation of law or disadvantaging the shareholders there.
In the last few days, Bank of America has reversed the position that they had had. And that is that they said that they were operating, their executives, under the guidance and advice of their lawyers, but that they were not willing to reveal what it is their lawyers had told them because of the attorney-client privilege.
And, for whatever particular reasons, Bank of America has reversed that position and is now going to allow the authorities, both in Congress and I believe in the New York Attorney General’s Office, to review the advice that their attorneys had given them.
Goldman Sachs sees profits
JEFFREY BROWN: All right. Now, if we broaden out the picture a bit, as I said, some banks, notably Goldman Sachs, are making huge profits. Now, how does that jibe with what you were just saying about the problems at B-of-A with consumer loans, mortgage lending? Explain the disconnect there.
CLAYTON ROSE: It's a good question. The -- Wall Street and the financial industry in general do not all operate in the same sectors. Bank of America, as we have discussed, is more highly focused on the consumer side of the business, and their assets are much more sensitive to the fortunes of the consumer.
Other firms -- Goldman Sachs is an example you have used -- have different business models, and are tied either to trading their own capital and/or are tied to the business sector.
In the case of a company like Goldman Sachs, much of the earnings that they have generated in this quarter in particular relates to two things. One is trading for their own account and using their own capital, as well as trading for their clients, institutional investors, among others.
And that is not tied to the consumer at all. In fact, that's tied to the volatility, the movement in the bond markets and in the stock market. And an upward trend in those markets also tends to fuel earnings, historically.
And, as well, these firms have had assets on their balance sheets that, a year ago, when we were in the depths of the crisis, they were writing down very aggressively. As the crisis seems to have subsided here, and those asset values have been buoyed, they have been riding them up a bit. So, they also get a tailwind in recovering some of the value of the assets that were on their balance sheet.
So, while they're all part of the same financial sector, they are really operating in different parts of the business.
The role of consumers
JEFFREY BROWN: And let me just ask you, in our last minute here, then, do you -- is that a temporary phenomenon, or do you see a kind of long-term situation of more haves, have-nots, some firms doing well, other perhaps not?
CLAYTON ROSE: I certainly think there will be haves and have-nots, which is part of a market system generally, but we are in a very unique period.
I think that those firms whose -- that have their fortunes tied to the consumer, like Bank of America, are going to have to wait for the economy to really stabilize and start growing again, and, in particular, to begin to see unemployment subside and fall. And that may not happen until, some argue, the first quarter or well into the second quarter of next year.
Other firms, like Goldman, J.P. Morgan, and -- and those that have a different mix of businesses, I think, will likely do better. In addition, I think that those firms that are, at the moment, the extraordinary -- have received extraordinary government assistance, like Citi and Bank of America, are going to be held back in their ability to compete effectively against those firms that are not under government assistance at the moment.
JEFFREY BROWN: All right, Clayton Rose of the Harvard Business School, thanks very much.
CLAYTON ROSE: Thank you, Jeffrey.