Lenders are reporting profits. Washington is finally dealing with banks’ toxic assets. Stocks have rallied somewhat. Is the worst over for big banks?
One of the industry’s healthiest players, Wells Fargo (WFC), isn’t celebrating just yet. Chief Executive John G. Stumpf’s main worries: the recession and unemployment. Stumpf is bolstering the bank’s books and making fresh loans. But a deep, prolonged downturn with double-digit unemployment could derail his plan to modify troubled mortgages and absorb Wachovia, the bank that Wells purchased for $15 billion in January. “This downturn is different,” says the 55-year-old banker. “It will define a generation.”
The economy remains a giant unknown for the entire industry. The government’s own “stress tests” for banks use 10% unemployment as the worst-case scenario. But a growing number of economists are predicting that the jobless figure could easily blow past that level in the next year. As unemployment rises, more borrowers run into trouble, leaving lenders to cope with the losses.
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