After staging one of the most remarkable comebacks in business history — because of taxpayer lifelines and other support from Washington — the giants of the banking industry are entering a new phase of the postbailout period.
While, for many Americans, the dark fears of the crisis have given way to indignation over the Lazarus-like recovery at big banks, few on Wall Street expect 2010 to be as profitable as 2009.
All told, the half dozen biggest banks have already made more than $50 billion in the first three quarters, and are on track to deliver a year of hefty profits — and bonuses — that could rival those of the boom years.
But at this pivotal moment, big questions loom: Will the economy stage a robust recovery or just muddle along? Will the stunning rally in the stock market last?
As the debate rages over how to prevent future crises, will Washington impose tough new rules on banks? More important, will banks fundamentally change the way they do business, or simply carry on as before?
“That is the larger issue hanging over the industry at this point,” said Lawrence H. Summers, the chief economic adviser to President Obama. “I think the view of some in Manhattan and the view from rest of the America, including the administration, is very different.”
Rarely has the divide been so deep between Wall Street and Main Street.
Even as Mr. Obama urges banking executives to do more to help the economy recover, many homeowners and small businesses say banks are reluctant to make loans. The banking industry has throttled back lending for the last 15 months, draining more than $3 trillion of credit from the economy.
When housing prices were rising, Peter M. Allen might have had little trouble refinancing the mortgage on his home in Palo Alto, Calif. Now, like millions of Americans, Mr. Allen, 50, is out of work, and the banks are turning him away.
“Things have changed,” Mr. Allen, an engineer, said. “They were basically closed for business.”
As banks enjoy a recovery, lending may slow further as the Federal Reserve shifts its focus from spurring growth to heading off inflation, reversing the current period of ultralow interest rates that has been a boon to banks.
Right now, low rates are fattening banks’ profit margins, since many lenders are not passing on their own low costs to borrowers. Lending rates will also spike as the government withdraws its trillion-dollar support of the mortgage market in the spring.
“Are they going to kill the housing market?” said Laurence D. Fink, chief executive of BlackRock, a big money management firm. “That is an issue.”
Most banks are hunkering down in anticipation of another big wave of real estate and consumer loan losses. Small and midsize banks are expected to be hit especially hard: They must absorb nearly $900 billion of commercial real estate losses over the next few years, causing several hundred banks to fail.
The big banks, meanwhile, face a range of new regulations that take effect in 2010.
Rules curbing overdraft fees and predatory practices in the credit card business are expected to squeeze the flow of billions of dollars from penalty income. They will also have less wiggle room as regulators require them to hold larger cash reserves, reducing their returns and forcing them to be more conservative.
That heralds a sharp drop in profits, especially if the ebullient stock and bond markets, which generated billions in trading revenue last year for Goldman Sachs and other Wall Street giants, tapers off in 2010.
Analysts say that bank profitability might fall by a third from its precrisis levels, to where it was in the ’60s, ’70s and ’80s.
“We tend to believe it is back to the future,” said Frederick Cannon, a senior banking analyst at Keefe Bruyette & Woods.
Wall Street has responded by beefing up its financial lobby in Washington to win big concessions. Among other things, the industry is working to ease rules governing derivatives and to weaken a proposal for a consumer financial protection agency.
Already, there is the sense that the political momentum to force meaningful changes has ebbed as banks returned to profits and bonuses last year, and broke free of government control.
“This is no time for a return to business as usual,” Paul A. Volcker, the chairman of the president’s Economic Recovery Advisory Board, said in a recent speech in Germany. “The rally in world stock markets from recession lows has brought renewed hopes on Wall Street and the City of London for a return to outlandish bonuses for financial operators and a vigorous defense of established vested interests.”
The industry’s leading executives insist that they have cleaned up their act and that reforms dragging through Congress will draw a line under the crisis and correct the failings that caused it.
“There were significant flaws that came out of financial services,” said Jamie Dimon, JPMorgan Chase’s chairman and chief executive. “Some things are going to change forever.”
The question is how much.
Exotic financial products, like the so-called C.D.O.-squared, are unlikely to return. Bundled loans, which financed so much of the mortgage boom, will come back as a smaller, more conservative business.
Bankers, badly bruised by the crisis, are putting a dagger in the “Ninja” loan — which required “no income, no job or assets” to pass muster with a credit officer.
After two decades of deregulation, they will now have to contend with more stringent rules.
Some of the banks are cutting back on their risk-taking.
And while they are paying out heavy bonuses, they are making sure they can claw back the paychecks if employees make big losses in the future.
James P. Gorman, the next chief executive of Morgan Stanley, a Wall Street firm that nearly went under during the crisis, said: “There will be real progress in 2010. I am pretty optimistic.The industry understands what has happened and what needs to be done.”
But a year after the crisis, there is still a looming question about how to deal with banks that are too big to fail.
Despite heated debate, the government has still not decided how to support a failing bank without pumping in billions of taxpayers’ money to avoid contagion in the broader financial system.
But the banks that a year ago were too big to fail are now bigger than ever.
“Fear has dissipated, greed has returned — but these structural problems are still there,” said Peter Nerby, an analyst at Moody’s.
Without a plan for shutting down banks that stumble, the nation’s biggest banks still enjoy an implicit guarantee from the government: If they run into trouble the taxpayer will bail them out.
Economists worry this is only encouraging them to take risks again, which could mean another crisis in the future.