Mortgage boom lifts US banks

After a lacklustre few quarters due to a struggling economy and choppy markets, third-quarter earnings at American banks proved better than expected. JPMorgan Chase reported a 36% year-on-year jump in profits to a quarterly record of $5.3bn. Wells Fargo, the biggest mortgage lender, made $4.7bn, also a record.

Goldman Sachs bounced back from a poor third quarter in 2011, thanks to a strong performance by its investment banking and trading divisions. Citigroup's underlying profits rose by 27% to $3.3bn. Citigroup's CEO Vikram Pandit suddenly stepped down, accompanied by chief operating officer John Havens.

What the commentators said

The banks remembered "the first rule of post-crisis banking", said Lex in the FT. When the Federal Reserve is "spraying money around, get in the way". The Fed has pledged and has just started to buy mortgage debt with printed money until the economy improves.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Along with previous quantitative easing programmes, this has driven mortgage rates down to record lows. The rise in house prices and a slight easing in lending standards have also helped spur a refinancing boom. Banks are earning more in fees by writing more mortgages while also earning money from packaging up the mortgages and selling them on. The Fed's mortgage security buying is driving up prices for these bundles.

Meanwhile, Pandit's exit "restores the air of calamity that dogged Citigroup" during and after the credit crunch, said Tom Braithwaite in the FT. Earlier this year, the bank ended up at loggerheads with the Federal Reserve. It said that Citigroup's plan to buy back stock or pay a higher dividend would unduly weaken its capital positions. Then shareholders revolted against executive pay. Finally, Citigroup sold its stake in retail brokerage Smith Barney too cheaply.

Given all this, while his departure certainly wasn't expected to be this sudden, it seems he "succumbed to a basic rule", said Rob Cox on Breakingviews: "three strikes and you're out". More fundamentally, added Nils Pratley in The Guardian, it's still not clear what Citigroup is for. For all the talk of going back to banking basics, it's still "a sprawling and disjointed empire".