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Bailouts don’t help banks’ surprising profits

Did the taxpayer-funded bailout put banks back in the black? If so, should that really count as “making a profit”?  The Answer Desk.

This week’s reports on banking industry profits — after a string of money-losing quarters — are certainly good news. But readers are curious where those profits came from. Did the taxpayer-funded bailout put banks back in the black? If so, should that really count as “making a profit”?

In the headlines we see some of the large banks are reporting quarterly profits. My question is are they really making a profit or are they counting the money the government loaned them in these statements?
— Bill M., Stuttgart, Ark.

The government’s response to the financial meltdown has played a big part in the recent round of profits from some of the biggest U.S. banks. But your tax dollars didn’t flow directly to the bottom line.

The roughly $200 billion the Treasury Department has handed out to battered banks was swapped for a special class of stock that pays a 5 percent dividend (rising to 9 percent after five years.) As of April 15, the Treasury had collected about $2.5 billion in dividend payments on its investment.

So in that sense, the bailout money represents an expense for banks. That’s one reason a number of banks have said they want to give the money back as soon as possible.

The government has played a much bigger role in getting some backs back in the black — by engineering a dramatic drop in short-term interest rates to near zero. By borrowing from the Fed at zero and charging 5 percent or so to its customers, U.S. banks have been generating piles of cash. (Some banks also turned a tidy profit trading bonds, which have risen in value as interest rates have fallen.)

The banking industry also caught a break thanks to a change in the accounting rules covering assets backed by mortgages and other consumer loans. With the outlook for loan defaults still very cloudy, these investments have become virtually impossible to sell at a price bankers are willing to accept. Since there’s no “market price,” they’ve had to write down the value of these assets and take big losses. The rule change gives bankers more flexibility when they assign a value to these assets on their books.

The hope is that the Fed’s policy of clamping down on short-term interest rates — with over $1 trillion in fresh cash swapped for bank assets like bonds — will let banks generate their own cash fast enough to get them on a solid footing before a new panic threatens to topple another one. So far that part of the plan seems to be working.

It’s less clear that all that fresh cash is going to start flowing through the system to get the economy growing again. Despite the government’s best efforts, the volume of bank lending is declining. And unless and until it begins expanding, it’s hard to see how the economy can shake off the recession and start growing again.

The banking industry’s strong first quarter performance may be hard to repeat — even if the Fed continues to hold rates low. The trading gains will likely taper off as bond prices flatten out. And the continuing rise in unemployment means banks face more loan defaults this year. Earlier this week, the International Monetary Fund said U.S. financial firms face $2.7 trillion in losses through 2010 — nearly double its projection just six months ago.

That’s why the Treasury is combing through the books of banks that have taken taxpayer bailout money — in hopes of finding which ones face the greatest risk of rising losses. If it looks like a bank doesn’t have enough capital to sustain those losses, the Treasury may take its dividend-paying “preferred” stock and swap it for common shares.

That might help reduce the risk of a bank running out of capital. But it would put taxpayer dollars at greater risk. The government would then be subject to the same stock market risk that has wiped out trillions of dollars of Americans’ retirement savings.

I worked for Western Electric/AT&T  from 1974-1981 and need information on how to acquire monies put into retirement. What or who do I contact to find this information?
Sandra M.,Miami, Fla.

This particular portion of your nest egg is going to be pretty tough to unscramble.

Western Electric used to be the manufacturing division of AT&T, back in the days when “Ma Bell” was one gigantic telecommunications monopoly. When the government split it up in 1982, Western Electric was lumped together with Bell Laboratories in new division called AT&T Technologies. (The rest of the company was spun off into seven regional operating companies that have since merged back into two companies.)

In 1995, AT&T Technologies became Lucent Technologies, which AT&T then spun off as a separate company the following year. Lucent then spun off pieces of itself that became new companies, including Avaya and Agere Systems. In 2006, what was left of Lucent merged with Alcatel, a French telecom company.

So one place to start would be to contact Alcatel-Lucent and find out if they have a record of your pension contributions and if you’re eligible for benefits. But it may take a little digging. In a briefing with Wall Street analysts last June, the company said it maintains over 70 different pension plans, some of which date back 100 years.

You could also try to contact the a group called the Lucent Retirees Organization, which was set up in 2003 to represent the interests of 127,000 workers covered by pension plans for Lucent and the companies it acquired along the way. The group says it has over 11,000 members and is open to current retirees or anyone vested for a Lucent pension.

According to the Web site, you can contact the Lucent Benefits Center at 888-232-4111 or write to the LRO at benefits@lucentretirees com.

Your recent article about Geithner's interview littered with typos. I think this kind of presentation is unexceptable. Please have your staff improve their proof reading.
— Vex, Address withheld.

You’re right. Typos have no place in a well-written column. So we’ve fired the entire Answer Desk proofreading staff.

We hope you’ll except our apologies.