US banking sector faces fresh test

A file photo shows Merrill Lynch offices in New York City. Merrill Lynch lost another $4.9 billion while posting its fourth-straight quarterly loss with gigantic writedowns.Photo: AFP

A rebound in the beleaguered banking sector faced a fresh test Thursday as two key financial firms prepared to release quarterly results.
Banking titan JPMorgan Chase was expected to report a profit while investment giant Merrill Lynch was set to report a loss, in results that will be closely scrutinized by financial markets for signs of health of the sector.
The results come a day after a sizzling Wall Street rally that saw a wide banking sector index jumping 16 percent, fueled by a strong earnings report from Wells Fargo and positive comments from Fed chairman Ben Bernanke on mortgage finance giants Fannie Mae and Freddie Mac.
Bernanke said ailing Fannie Mae and Freddie Mac are "in no danger of failing."
Bernanke's comments in Congress coincided with a sharp rebound in shares of the beleaguered mortgage-finance titans and a snapback in the banking sector as fears faded about a meltdown in the global financial system from mounting losses on US real estate.
Shares in Fannie Mae leapt 31 percent to 9.25 dollars and Freddie Mac climbed 29.8 percent to 6.83 on Wednesday. Yet both are down more than 75 percent for the year.
The turmoil of the past week appeared to ease as markets assessed the outlook for the banking system and the portfolios of Fannie and Freddie, shareholder-owned government-sponsored enterprises (GSEs) which underpin some five trillion dollars in mortgages.
"The GSEs are adequately capitalized. They are in no danger of failing," Bernanke told lawmakers of the House of Representatives in a second day of testimony to Congress on the central bank's semiannual economic report.
"However, the weakness in market confidence, this is having real effects as their stock prices fall, (and) it's difficult for them to raise capital."
Bernanke said the loss of confidence could prompt higher rates on bonds of the two firms, and accordingly increase their borrowing costs.
The crisis has prompted the Fed to open up its discount window to the two firms and President George W. Bush's administration has proposed other steps to help shore up confidence.
Fears of a banking crisis had mounted since the failure last week of California-based IndyMac.
But Wells Fargo, another California-based bank, reported Wednesday a stronger-than-expected quarterly profit of 1.8 billion dollars and boosted its dividend, propelling other banking shares higher.
Fred Dickson, a market analyst at DA Davidson and Co., said a new emergency rule ordered by stock market regulators to curb some speculative "short sales" of key financial firms could help steady the market.
"The moves ...should eliminate some of the huge market volatility in these issues thus restore some stability to the overall market," Davidson said.
The Securities and Exchange Commission, in issuing its new rule, stated: "False rumors can lead to a loss of confidence in our markets."
The SEC said a loss of confidence "can lead to panic selling, which may be further exacerbated by 'naked' short selling" that would prompt an accelerated decline.
The SEC said this situation worsened the situation for investment giant Bear Stearns before its near collapse in March, forcing a sale to JPMorgan Chase.
As financial markets appeared to steady, the Fed released minutes from its June policy meeting showing ongoing uncertainty about the economic outlook.
But policymakers agreed at their meeting last month that their next move on interest rates would probably be an increase, after a series of easing moves, the minutes showed.
"With increased upside risks to inflation and inflation expectations, members believed that the next change in the stance of policy could well be an increase in the funds rate," the minutes said.
"Indeed, one member thought that policy should be firmed at this meeting. However, in the view of most members, the outlook for both economic activity and price pressures remained very uncertain, and thus the timing and magnitude of future policy actions was quite unclear."