- The Washington Times - Friday, April 10, 2009

Wells Fargo on Thursday became the fourth major bank to say it is enjoying record earnings in the first quarter, thanks to a mortgage refinancing boom, record low interest rates and a $25 billion cash infusion from taxpayers.

It was the latest in a series of signs that the economy may be stabilizing from its free fall and the banking crisis may be waning. Wells Fargo's surprise announcement - like similar announcements last month from Citigroup, JP Morgan and Bank of America - appeared aimed at spurring a big stock market rally. Wall Street responded with a 246-point gain, with bank stocks posting double-digit increases.

President Obama on Thursday hailed the drop in mortgage rates to record lows of about 4.6 percent, which boosted refinancings by 88 percent in March, and urged more Americans to seize the opportunity to lower their monthly payments. Wells Fargo, a top mortgage lender, attributed much of its improved earnings to $100 billion of new mortgages it made in the quarter.

“We are at a time where people can really take advantage of this,” the president said at the White House while seated among people who have refinanced.

He was touting his program for helping homeowners refinance mortgages held by Fannie Mae and Freddie Mac even if their home values have fallen a little below their loan totals. For consumers, “that is money in their pocket,” he said.

While the administration has rolled out programs to help banks and homeowners, most of the credit for record low interest rates goes to the Federal Reserve, which has driven down rates by purchasing hundreds of billions of Fannie Mae and Freddie Mac mortgage debt this year. The result has been a frenzy of refinancings that has stirred hopes that the extra money for homeowners will help to arrest a collapse in consumer spending and the broader economy.

The unexpectedly good performance of the nation's major banks also has nurtured hopes that the economy is bottoming, only months after many seemed to be on the brink of failure and in need of government infusions to stay afloat. Wells Fargo was among nine major banks that the Treasury gave up to $25 billion in funding last fall, although the bank said at the time that it didn't need or want the money.

“Calling the end has been an exercise in painful futility” for economic forecasters, said Antony Currie, an analyst at Breakingviews.com, but Thursday's news from Wells Fargo “is encouraging,” particularly because the bank deducted more than $3 billion in losses on souring loans and still came up with a record profit of $3 billion.

The bank said it also is prospering from paying practically nothing for the funds it borrows, while it is nearing the end of charge-offs for more than $100 billion of souring loans it took on when it acquired Wachovia last year.

“Of course, even if the banking crisis is over,” said Mr. Currie, “the worst recession in decades will bring more pain.”

Stock investors have been elated in recent weeks by signs of stabilization in the banking sector and the economy, sending stocks up by 25 percent in a March rally that was the strongest in decades.

Adding to signs of an economic plateau Thursday were reports of a drop in weekly new jobless claims and a plunge in the trade deficit to a nine-year low.

The record seven-month decline in the trade deficit to half its former high led economists to conclude that the free fall in the economy lessened during the first quarter. They now project that economic output fell less than 5 percent during the quarter, compared with the 6.3 percent drop seen in the final quarter of 2008. A small increase in exports, combined with the dramatic drop in imports, will lessen the blow to economic growth, they said.

Still, with industrial production and the job market still in collapse, Harm Bandholz, an economist at Unicredit Markets, said he does not expect the economy to “finally stabilize” until the second half of the year.

Lawrence H. Summers, director of the White House National Economic Council, agreed with that assessment in remarks to the Economic Club of Washington on Thursday.

“I think the sense of a ball falling off the table - which is what the economy has felt like since the middle of last fall - I think we can be reasonably confident that that's going to end within the next few months and you will no longer have that sense of free fall,” he said. The recovery is likely to be slowed by “substantial downdrafts” in the economy, however.

“Economies don't go from losing 600,000 jobs a month to a terribly happy path overnight,” Mr. Summers said, noting there are “still substantial strains in credit markets.”

Even though some big banks that were engulfed in turmoil last fall are now doing better, analysts say they remain far from the picture of health that might enable them to return the taxpayers' money, as Wells Fargo's chief executive, John Stumpf, once suggested he would like to do to avoid restrictions on executive pay imposed by Congress.

Mr. Stumpf did not repeat his wish to return taxpayer money in announcing the bank's profits Thursday. But the bank did say it would pay the Treasury $372 million in dividends on the preferred stock the government acquired. Analysts said the $23 billion cash cushion that the bank has amassed to protect against further loan losses surely would be far smaller without the taxpayer funds, and it likely cannot afford to return them.

In any case, none of the nation's largest banks will be allowed to return the money until the Treasury completes “stress tests” to determine whether the banks can withstand the significant further deterioration in the economy that many economists foresee. Banks will be required to add to their capital or accept more Treasury funding if they come up short.

Some analysts said Wells Fargo and other banks may be benefiting from a change in accounting rules announced last week that gives them flexibility in assigning values to the souring loans in their portfolios. Those rules enable banks to report lower losses and higher profits than they would if they valued the loans at today's depressed market prices.

Martin D. Weiss of Weiss Research Inc. said that banks, regulators and investors all are greatly underestimating the debt problems that could still bring down big banks like Wells Fargo, JP Morgan, Citibank, Goldman Sachs and HSBC.

The debt problems began with mortgages, but they have now spread to every other loan sector and pose the threat of $4 trillion in bank losses worldwide, he said. Banks so far have accounted for only about a third of those losses, he said.

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