Page last updated at 17:23 GMT, Friday, 15 January 2010

US banks braced for big bonuses as profits bounce back

By Rebecca Marston
Business reporter, BBC News

US Federal Reserve building
Well Fed: one bank that has done well out of the crisis is the US Federal Reserve

US investment bank JP Morgan Chase has become the first of the Wall Street giants to report its results for the fourth quarter of 2009.

Overall they are expected to have done reasonably well, although with the exception of Goldman Sachs, none of them are expected to set any records.

What may well prove to be record-beating, though, are the collective bonuses for the bankers themselves.

JP Morgan Chase's $3.27bn (£2bn) earnings for the last three months of the year kicked off the banking reporting season. It left the bank with a full-year profit of $11.7bn.

On Monday, Citigroup will follow, with Bank of America, Morgan Stanley, Wells Fargo and Goldman Sachs hot on its heels with their own figures.

The crisis looks to be well and truly over for the US banks - but how are they making money?

The US economy may now be officially out of recession, but it is not exactly growing at a sprinter's pace.

Government goodies

A lot of the banks' good fortune has come as a direct result of government policy.

Measures to stimulate the economy have also tickled the banks into life.

For starters, lower interest rates meant an immediate rise in value of the fixed-interest bond holdings the banks own.

Issued when interest rates were higher, their attraction and value increased without banks taking any action at all.

Bonds are also an important source of income. Governments are borrowing more money than ever, and they need banks to handle these issues, a service for which they charge a fee.

Cheap money

Even more simply, lower interest rates make borrowing easier and cheaper and allow for higher profit margins when they lend any of it out.

JP Morgan top-line results were disappointing
David Buik, partner at BGC Partners

And, with quantitative easing, banks have been able to borrow money very cheaply indeed.

Some of the increase is simply because the firms that survived got bigger. JP Morgan bought Washington Mutual and Bear Stearns, Bank of America took over Merrill Lynch and Countrywide Financial.

But the weak areas of the economy mean losses on loans and bad debt provisions.

"JP Morgan top-line results were disappointing," said David Buik, partner at BGC Partners in London. "There were pressures on credit card lending and retail banking and it just shows the US economy is far from out of the woods yet."

Boom time for bonuses

Even so, a bonus bonanza looks likely. The major banks and other institutions are expected at least to match the previous bumper year of 2007 - and may even beat that - despite anger from regulators, government and the banks' own customers.

Wall Street sign
All's well for the banks on Wall Street - but in the real economy times remain tough

A Wall Street Journal analysis found that banks and securities firms were on track to pay employees $145bn, a record amount.

It is something that is so ingrained in banking culture that even the prospect of paying up to $117bn back to US taxpayers does not appear to threaten to hold back the largesse.

How the banks will fare going through this year does, of course, depend heavily on whether the economy grows smoothly or heads into another rough patch.

What is certain to continue to ruffle the banks and the bankers is a continuing debate about the size of the banks, and whether or not those who work in them deserve to get a bonus.

The answer to that - from almost everyone who isn't actually a banker - is an easy one to guess.

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