Yearender: U.S. financial sector recovers in 2009 but weakness remains

NEW YORK, Dec. 13 (Xinhua) -- Since March 2009, the U.S. financial sector has been on the mend. However, credit conditions remain tight while financial institutions are still in the stage of de-leveraging and cleansing of their balance-sheets.

Supported by a wide spectrum of policy measures of massive scales, stabilization has gradually shown in various parts of the financial markets.

In equity markets, better than expected economic data and corporate earnings have helped lift benchmark indices to new highs for the year. The S&P 500 index, which fell about 40 percent in 2008, rose more than 20 percent this year while the Dow Jones industrial index climbed around 20 percent.

Improvements in equity market conditions helped financial institutions regain access to market funding and reduce the need for government assistance. For example, many large financial firms were granted permission to repay the government aid. A number of these firms also subsequently redeemed the warrants attached to share purchase, thereby formally relieving themselves of the costs and non-price conditions of the program.

Wall Street, which had led the market down in 2008 and early 2009, has led the markets turnaround. In a recent report released by Thomas P. DiNapoli, the comptroller of New York State, Wall Street profits in 2009 are on track to exceed the record set three years ago, at the height of the credit bubble.

The report noted that the four largest investment firms GoldmanSachs, Merrill Lynch, Morgan Stanley and the investment banking arm of JPMorgan Chase, earned 22.5 billion U.S. dollars in the first nine months, in contrast to losses of more than 40.3 billion dollars in 2008.

Fueling the gains were extraordinary profits from the firms' own securities trading accounts as they borrowed at near-zero interest rates and put the money to work in the securities markets.

In turn, the profits are contributing to a resurgence of bonuses on Wall Street. Six of the top American bank holding companies set aside 112 billion dollars for salaries and bonuses, including deferred payments, in the first nine months.

Credit market has also improved over the last few months. Credit spreads narrowed and corporate bond issuance remained high amid initial recovery signs and positive earnings from a number of major financial institutions. Meanwhile, the mortgage and securitization markets in the United States continued to benefit from government support. Agency mortgage-backed spreads have declined since November of 2008 following the Fed's announcement of plans to purchase agency securities.

Despite all these improvements, credit constraints remain as an impediment to the recovery while the high unemployment rates and the weakened income and wealth position will continue to curb household consumption and business investment.

The credit market continued to reflect the weak financial situation, such as markets for asset-backed securities backed by consumer and business loans and for commercial mortgage backed securities.

Weakness also remained in the commercial paper (CP) market. The lower rate of CP issuance, together with the high corporate bond issuance, point to a significant decline in short-term corporate funding.

"We have come a long way from the darkest period of the crisis, but we have some distance yet to go," said the Federal Reserve Chairman Ben Bernanke at the Economic Club of Washington D.C. earlier this month.

Markets have become concerned over the strength of economic recovery, in particularly questioning about the quality and sustainability of the profitability of financial companies. These concerns may lead to increased volatility in financial markets in the future.