Millions of Americans are still struggling to find work in the aftermath of the 2008 financial crisis. Meanwhile, Wall Street is enjoying another banner year, earning an estimated $19 billion in 2010, according to a report by New York State Comptroller Thomas DiNapoli. That would make it the fourth-most profitable year for the industry.
Christopher Whalen, co-founder of Institutional Risk Analytics, doesn’t expect the good times to last much longer -- especially for the big banks. Whalen thinks they’re headed for a world of trouble -- although if you follow his comments, you know he’s been saying that for at least a year. (See: The "Real" Economy Is Dying: Q4 "Going to Be a Bloodbath," Whalen Says.)
"The crisis is going to come when people realize this current GDP level… is normal," he says, referring to the economy's 2% annual growth rate last quarter. That realization will lead to a sell-off in bank stocks, he predicts. “I don’t see how they (the stocks) can go up if we have down revenues and uncertain GDP.”
The heart of the problem remains flawed and risky real estate loans banks are still holding; Whalen says two-thirds of big banks assets are shrinking as a result.
“There’s a lot of losses in the system that investors haven’t seen yet,” he tells Henry in this clip. “All the industry is willing to do is admit to as much loss as they have cash flow, this quarter,” something banks are allowed to do now that the mark-to-market accounting rules have been removed.
Compounding the problem is a low interest rate environment that is becoming less beneficial to banks. Whalen says net interest rates margins are shrinking – meaning the spread between the rate banks borrow at and the rate they collect on their loans is shrinking, as older loans expire or get refinanced.
Zero interest rates are also making matters worse for the real economy, as Whalen details in his new book Inflated: How Money and Debt Built the American Dream.
Ben Bernanke's zero-rate policy is causing havoc with corporate pension funds expecting and needing to make greater returns to meet funding obligations, he says. “I think we’re going to have big trouble next year if we don’t let rates go up. Even 1% compounded is better than zero."
Fortunately, it’s not all bad across the board. The smaller, regional banks, are recovering. US Bancorp and BB&T, are two Whalen speaks favorably of, although, to avoid conflicts, he does not personally own any bank stocks.