SOS Banking Profits

USD'bil 2004 2005 2006 2007 2008

S&P500 610 689 791 744 570
S&P FI 189 197 227 157 (155)
% 31% 29% 29% 21% n/a

S&P Financial Index (FI) mainly consist of financial casinos like BOA, Citigroup, Goldman, JP Morgan, Morgan Stanley, Lehman, UBS, and AIG (contribute about 50% of S&P Financial Index)

The major investment banks in US is geared more than 30 times because of derivatives, such as CDO, MBS, CLO, CDS, Liar Loans (mortgage, credit card, student loans). These are "non real economy" profits. It is "phony profits", cannot be sustained. It arises from "fractional reserve system" i.e. one dollar capital can provide up to 10 dollar loan (which is assets to the bank). For investment banks, its gearing can be as high as more than 30 times its shareholders' fund.

The contribution of 30% of financial profits to USA GDP is not sustainable. They are faced with 5 problems:

1. The profits will be evaporated (hence 30% of the earnings will be wiped out);


2. The bad debts arising from the bubble assets will further deteriorate and cause the banking system unable to provide new credits;


3. The bailouts, USD700 billions merely slowdown the bad debts (CDS itself is about USD5.5 trillion, Mortage loan is about USD20 trillion, US stocks has loss about USD10.5 trillion in market value);


4. Real economy is unable to get new credit to grow, hence, profits will come down


5. Unemployment made the consumer unable to buy further, hence, bring down the real economy, because US the consumer contribute 70% of the GDP, i.e. about USD9.5 trillion.

So, in short, the economy of USA for the last many years is unsustainable. It created a property bubble, stocks bubble, commodities bubble, consumer loan bubble, banking bubble, and real economy bubble. Most resources (capital and human resources) went to the phony industries like banking, housing, equities, capital goods like cars etc.

Now, US and UK and Europe are paying for their "Ponzi Scheme."