“Sagging fortunes.” Can’t get away from that catch-phrase these days. It’s a favorite of both sports and finance writers alike as in…The sagging fortunes of the Seattle Mariners (in baseball) and Roger Federer (in tennis). Or as in…

The sagging fortunes of real estate, retail, auto companies and a host of other sectors.

But a closer look at second quarter earnings reports reveals that so far only four of the S&P’s 10 sectors are reporting negative profit growth: consumer discretionary, materials, financials and telecom. Of those four, the biggest loser by far is financials. Their profits are down by 85 percent compared to the second quarter of last year.

So, banks are being punished for turning in such a terrible second quarter performance, right? Strangely, that is not what is happening. Let’s take a look at the KBW Bank Sector Index.

Earnings go down and shares go up? Does this make sense to you? It does if you knew that Wall Street is breathing a huge sigh of relief over banks. You see, the government has stepped in (yet again!) to make emergency cash and loans available to banks in need.

But that’s not all. The FASB recently gave banks permission to continue hiding losses on their off-balance sheets, as reported in the following from Bloomberg:

“The Financial Accounting Standards Board postponed a measure, opposed by Citigroup Inc. and the securities industry, forcing banks to bring off-balance-sheet assets such as mortgages and credit-card receivables back onto their books.

“FASB proposed having companies put new securitization structures on their balance sheets for fiscal years starting after Nov. 15 this year. The Securities Industry and Financial Markets Association and the American Securitization Forum complained that the changes, which could affect as much as $11 trillion of off-balance-sheet entities, may make companies appear short of capital to regulators and lenders.”

Despite all this coddling, hundreds of banks are still expected to fall by the wayside.

The Stanford Group says that “regulators are expecting 100 to 200 banks to fail”. There were no failures in 2005 and 2006 and only three in 2007. So far this year there have been eight.

What we’re seeing now is not the end of banks’ slide, but a mini-rally cheering the government’s latest moves. Banks are getting a little reprieve. They better enjoy it. It won’t last long.

Source: Banks Are Lending on Borrowed Time