Rescued Banks Post Big Profits, Drawing Ire

Experts say that lending cannot recover completely until investors start providing money again.

Bank of America posted earnings of $3.22 billion for the second quarter, or 33 cents a share. That was down from $3.41 billion (72 cents) in the period last year, but it represented a large turnaround from the bank's struggles in the fall. Citigroup reported a $4.3 billion profit, or 49 cents a share, reversing a loss during the comparable period last year of $2.5 billion (55 cents). As with reports earlier this week from Goldman Sachs and J.P. Morgan Chase, the earnings exceeded analyst predictions by a wide margin.

Despite offering emergency aid to the firms, the government gets little direct benefit from their profits, which go mostly to employees and common shareholders. The government will soon hold common shares in Citigroup, which could increase in value, and it still holds preferred shares in Bank of America, which do not fluctuate in value but do pay a regular dividend. Officials have said the investments were intentionally structured to produce modest returns because the real goal was increased lending.

The two companies reporting yesterday earned large sums from the sale of business units and other investments. Bank of America made $5.3 billion by selling part of an investment in China Construction Bank, and $3.8 billion from the sale of a merchant-processing business. Citigroup booked a $6.7 billion gain on the sale of a majority interest in its Smith Barney brokerage.

The companies also benefited from a revival in the investment-banking business. The value of investments started to rebound, and investors started to spend money again. The big banks all benefited from the absence of former rivals such as Lehman Brothers and Bear Stearns, but the strongest banks benefited the most. Goldman Sachs and J.P. Morgan Chase also were able to draw business away from Citigroup and Bank of America, according to financial analysts and executives.

The revival, however, was a product of federal intervention as much as economic recovery. The Federal Reserve provided all the banks with vast sums of cheap money, and the Federal Deposit Insurance Corp. helped banks to borrow from private investors.

"The reason we have strong capital markets is because the government is guaranteeing everyone's liquidity," said Paul Miller, a financial analyst at FBR Capital Markets.

Citigroup has required the most help. The government has invested a total of $45 billion, guaranteed to limit the company's losses on a huge portfolio of troubled loans, and allowed the company to repay the government with common stock, rather than requiring the regular dividend payments that other banks are required to make.

Bank of America is a close second. The company also got a $45 billion investment and a government guarantee to limit losses on troubled loans.

J.P. Morgan Chase last month repaid $25 billion in federal aid, and Goldman Sachs repaid $10 billion, but both companies continue to rely on the emergency borrowing programs.

The aid has allowed the banks to survive despite suffering major losses on loans made during the economic boom.

Bank of America said it had abandoned efforts during the second quarter to collect on almost 14 percent of its outstanding credit card loans, almost doubling its loss rate during the period last year. Its loss rate on mortgage loans increased more than sevenfold. Unlike in past downturns, the rate of defaults has continued to increase more rapidly than unemployment, as many Americans who still have jobs still prove unable to repay loans.

Bank of America chief executive Kenneth D. Lewis said he does not expect the numbers to improve until next year.

"We have to get through the next few quarters," Lewis told financial analysts on a conference call yesterday.

Government officials have repeatedly said that the aid programs are designed to spark new lending, but experts said that was never a realistic goal.

"This is all about survival at this point. You look at all these balance sheets, they're shrinking. Nobody's really adding liquidity to the system," Miller said. "It's going to take a while for this system to heal itself. There's a lot of damage out there, and it's going to take a while to get through it."