The U.S. Federal Reserve’s actions in cutting short-term interest rates to almost zero – together with a gentle rise in U.S. Treasury bond yields since the start of the year – have given us a steeply sloping yield curve, where long-term rates are about 3% above short-term rates.

What’s more, lending rates to corporate and personal borrowers are way up, far more than Treasury bond rates. That means one thing: In their new lending – particularly to small businesses – banks are making money like gangbusters.

At least, some of the banks are…

Let me explain.

The “steeply sloping yield curve” is bond-market jargon for a situation where long-term bond rates are far above short-term money market rates. In this case, the Fed has forced money market rates down to nearly zero, but has had much less effect on long-term bond rates, which have shown a tendency to rise, both because of the escalating budget deficit and because of the possibility of recurrent inflation arising from the Fed’s rapid expansion of the money supply.

Since banks generally borrow short-term money – in the form of demand deposits and short-term time deposits – and generally lend medium-term and long-term money, in the form of industrial loans and leases, automobile loans and home mortgages, a steeply sloping yield curve makes the banking business exceptionally profitable. Borrowing short-term at 1% and lending on a prime home mortgage at 5.5% or 6%, often with a “government” guarantee from Fannie Mae (FNM) or Freddie Mac (FRE), is good business however you look at it, for as long as the steep yield curve lasts.

In addition, the premium that industrial borrowers pay above U.S. Treasury bond rates has sharply widened, so banks can make much more money on their commercial loan and lease business.

That doesn’t mean we should all rush out and buy shares in Citigroup Inc. (C). For one thing, Citigroup is involved in all sorts of investment banking, and in a variety of trading businesses, most of which are either down sharply due to the recession or that have disappeared altogether. For another, we still don’t know how large and how toxic are the assets on Citigroup’s balance sheet.

Whereas regional banks have been coping quite well with their impaired-value assets, Citigroup has been forced to get a $300 billion guarantee on its assets from the Fed, and nobody knows if even that will be enough. The bank is now controlled by the government, and may be nationalized entirely.

Even at their nadir of 97 cents last week, Citi’s shares are nothing less than a lottery ticket. That ticket would have paid off if you’d bought last week, with a gain of 130% in a week, but neither I nor anyone else can give you accurate odds on whether it will pay off in the weeks to come.

Of the big banks with assets of more than $1 trillion, only one is attractive. Apart from Citigroup, Bank of America Corp. (BAC) made two foolish acquisitions in 2008, and is now struggling with the dodgy housing assets of Countrywide Financial Corp. and the huge investment banking problems of Merrill Lynch & Co. Inc. (which is likely to make much less money in a deep recession than it could in a boom).

J.P. Morgan Chase & Co. (JPM), similarly, has huge investment banking businesses and large trading businesses; its businesses in consumer and small business lending are relatively modest. And the other two behemoths that now have conventional banking licenses, Morgan Stanley (MS) and Goldman Sachs Group Inc. (GS), still are primarily investment banks, with almost no consumer and small business banking operations.

Of the trillion-dollar guys, that leaves Wells Fargo & Co. (WFC). Wells Fargo needed money in 2008 – it got a $25 billion capital infusion from the Troubled Assets Relief Program (TARP) – because it bought the retail bank Wachovia Corp., which was struggling with its own problems.

Wachovia was in difficulty because of its foolish top-of-the-market purchase of housing lender Golden West Financial in 2006. However, the combined Wells Fargo/Wachovia unit remains primarily a consumer- and small-business-banking operation, with a huge nationwide branch network and a relatively small investment-banking business. What’s more, there are clearly costs that can come out of the merged group because of their overlap.

Wells Fargo Chairman Richard M. Kovacevich has made snotty comments about the “asinine” federal bank stress test, wants to repay the TARP money, and recently cut WFC’s dividend by 85% to conserve capital. However, if the combined bank is as profitable as it should be, Kovacevich may well be able to repay TARP and restore the bank’s dividend payout surprisingly quickly.

The current dividend yield at 1.5% is nothing to write home about, but at around 85% of tangible net asset value, Wells Fargo is a “Buy” – and don’t forget, if and when Kovacevich restores the dividend, that yield will jump to 9.8%.

Once you leave the trillion-dollar guys, there’s a big gap – the next-largest banks are The PNC Financial Services Group Inc. (PNC) and U.S. Bancorp (USB) at around $290 billion. These regional banks are generally more attractive currently – provided that their bad assets are under control and that they operate in an economically attractive part of the country.

These banks have little or no involvement in investment banking, and those banks that concentrate on mid-market corporate customers and high-quality consumers should have huge current earning capacity – a multiple of that before the meltdown. That will enable them to take care of further nasty surprises in their asset book and leave a lot over for investors.

Of the Top 12 U.S. banks I surveyed in a special Money Morning story a few weeks ago [actually 13, if you include a separate report I did on Fifth Third Bancorp (FITB)], PNC was among the riskier institutions because of its acquisition of National City Bank – an operation as large as itself and based primarily in troubled Ohio and Michigan.

Bank of New York Mellon Corp. (BK) and State Street Corp. (STT) are both oriented toward investment institutions and larger corporate and commercial clients, with perhaps less upside potential from the current steep yield curve. Other banks appear to be having more difficulty with their loan portfolios, or – as is the case with Capital One Financial Corp. (COF) – are have oriented themselves toward high-risk credit card lending, which may still show further problems.

Thus, my favorite profit play to emanate from this banking-ranking exercise is the Minneapolis-based U.S. Bancorp, which operates in the upper Midwest and Northwest from its home market of Minneapolis all the way through to Seattle, an area with neither huge industrial problems, nor the remnants of a huge housing bubble. USB has also cut its dividend and wants to repay its $6.6 billion TARP funding: U.S. Bancorp Chief Executive Officer Richard K. Davis has been as rude as Wells Fargo’s Kovacevich on that topic, calling it a “giant bait and switch.”

U.S. Bancorp is currently selling at 130% of tangible net asset value, with a current dividend yield of only 1.5%, but a potential yield of 14% if and when Davis manages to repay TARP and restore the dividend.

Remember, too: Banks traditionally sold at 250% to 300% of net asset value. Once their dividends are restored, Wells Fargo and U.S. Bancorp should have every chance of reaching that level again – they will deserve to on the basis of the dividend yield and earnings power alone.

It may take two years – or even three – but a capital gain of 100% or so, on top of a juicy dividend yield, will make it well worth the wait.

Source: As Resurgent U.S. Banks Shift Into Profit Mode, Hitch a Ride With These Two for Gangbuster Returns

We are sitting here this morning, in our office, looking at a fat woman – stark naked – sleeping on a couch.

Of course, how rich people spend their money has always been a source of interest and entertainment. That an apparently sane and sensible man like Roman Abramovich spent $33,641,000 for the painting of the “Benefits Supervisor Sleeping,” must also be a comfort to the poor. At least, they don’t have to look at it.

But the world of money is a world of wonder…today, as everyday. We could begin today’s reckoning wondering why the rich are so eager to part with their money, for example…or why the poor are so eager to have it; they can see that it clearly impairs one’s judgment and degrades ones tastes.

Instead, we will wonder why those who constantly praise the virtues of capitalism seem to have so little faith in it.

What brings this wonder to mind is the latest legislation to clear the Senate Finance Committee. Congress is preparing to improve the way capitalism functions, by authorizing the Federal Housing Administration (itself an improvement of an earlier Congress) to insure $300 billion worth of home mortgages. Up until now, federal housing agencies could work all sorts of mischief; you could argue that without the implicit guarantees of Fannie Mae and Freddie Mac, or the explicit efforts of these quasi-public companies to create a huge market for derivatives based on mortgage finance, the whole housing bubble would never have occurred in the first place. Now – if this legislation becomes law, that is – new mischief is about to appear on the scene. The FHA will be empowered to help patch up America’s housing bubble.

The goal, said Senator Chris Dodd, is to keep people in their homes. He did not mention that these are the same homes whose owners demonstrably cannot afford them. Nor was he especially concerned that his meddling with the corrective machinery of capitalism was likely to throw a monkey wrench into the gears. Instead, like God on the 6th day of creation, he looked upon his handiwork and thought it was pretty good.

Everyone is perfectly happy to let capitalism do its stuff – as long as they like the results. But cometh a correction and all of a sudden the press is full of whining pundits and meddling politicians. Every correction brings forth new improvements until there are so many of them the system collapses under the weight. That why we have revolutions and bankruptcies, after all, to blow away the accumulated impediments.

And that is why the emerging markets have such an advantage. In many ways, people swing their arms and their hammers more freely in, say, Russia or China than they do in the United States of America or Britain – simply because there is nothing to stop them. These countries have already had their moments of violent desperation…their bankruptcies…and their revolutions. Both tossed out their entire economic systems in the late ‘80s and early ‘90s. They’ve been rebuilding – fast – ever since. The leeches haven’t had a chance to get their suckers attached.

America’s war against Iraq had its roots in many improving impulses. According to John McCain and Alan Greenspan, however, the taproot sank into Iraq’s oil fields; America wanted to secure its access to cheap oil, they say. Unfortunately, this program – like all government meddling – backfired. The price of oil was only $25 a barrel when the war began in September of 2003. Yesterday, it hit $130 a barrel. And the war itself is expected to cost the nation $1 trillion or more. For all its efforts, the US secured the most expensive energy in world history. (And then pushed food prices up to their highest levels in modern times too – keep reading…)

China, meanwhile, decided to take the capitalist road. Instead, of using military force to get oil, it simply bought it on the open market. It has sent its agents to secure, peacefully and honestly, long-term contracts for oil and the other natural resources it needs to feed its ravenous economy. Its buying is driving up prices for everything. But what would you expect?

Meanwhile, having completely failed in the Mideast, America’s improvers turned to the Midwest. Yes, dear reader, if we can’t get oil from the sands of the Gulf and Mesopotamia, we will squeeze it out of our own farmland. At least, that was the promise of the program to subsidize the production of ethanol. Capitalism could not be relied upon to fill America’s energy needs, said the kibitzers.

Capitalism had already pronounced its verdict on corn-based fuel: it was a bad idea. Later, environmentalists came to the same conclusion; it actually caused more damage than petroleum. But the US Congress, in its majestic wisdom, saw something in ethanol that capitalists and environmentalists had missed – campaign contributions and votes!

And so it came to be that a large portion of the US corn crop is diverted into fuel tanks. And so it comes to be that a large number of the world’s people – including Americans themselves – find their food much more expensive than it used to be.

And more thoughts…

*** In Haiti, people are eating mud.

We’re not making this up. There’s a photo of a miserable woman making mud cakes in Port-au-Prince, in yesterday’s Daily Telegraph newspaper.

For the benefit of readers who wish to cut their food budgets, the Telegraph gives us the recipe: you simply mix clay with salt and vegetable fat and lay it out in the sun to cook – like mud pies. Then, you call them “biscuits.”

Last time we looked, mud was not one of the main food groups recommended by dieticians. But all over the world, poor people have to make do with what they can find. Rice is the staple food in Haiti, and it’s trebled in price in the last year, says the Telegraph. Other grains are not far behind. Since January of 2007, wheat has gone up 200% and corn 150%.

Desperate poor have already rioted in 34 countries this year. The ghost of Thomas Malthus, if he bothers to read the paper, must be saying “I told you so.” Malthus predicted that population would grow faster than food supplies. Millions of people would starve, he predicted. Now, it looks like he might have been too optimistic. He died in 1834. Since then, a series of happy events and technological developments greatly increased the supply of food…while war and family planning reduced the number of mouths to be fed. Now, it appears that the gains from mechanization, bio-engineering, chemistry and land clearing may have reached their limits. We may soon reach “Peak Food”…the point at which the world can produce no more food. But the human population – especially the part of it that doesn’t eat at the Tour d’Argent in Paris – keeps growing. Experts predict that the world’s population will grow by 3 billion people over the next 40 years – a 50% increase. Where will the world get 50% more food? At what price? Who knows…but one thing is sure: there will be plenty of opportunities for the world-improvers to make things worse.