Feel completely free to consider this a reach, but for about a week there has been little cracks in the storm clouds over the financial system. None of these bits of good news signals any reversal in course but sometimes it’s good just to assemble the little pieces in one place:

• Citibank circulated an internal memo the week of March 9 that told employees that the bank was profitable during the first two months of 2009. The same has been true of Bank of America and J. P. Morgan/Chase.
• International bank HSBC announced that it will not need bailout money offered by the British government.
• Borrowing by US banks from the Federal Reserve fell below $20 billion last week for the first time since before the Lehman Brothers panic in September.

Uber-investor Warren Buffett responded in a CNBC interview about the ‘financial Pearl Harbor’ (his words) that he wasn’t as concerned about the banks because the current market dynamics (low borrowing costs, high spreads) would allow banks to ‘earn their way out’ of trouble. His assessment doesn’t make any future event gold, but after 78 years and 50+ billion dollars, he’s right some of the time.

The lending institutions have been stuck in neutral for almost six months (although not so many of the regional banks in western PA), and have been losing money for a year. While the Fed’s cuts of overnight rates have made it almost painless to borrow money from each other, the benefits of holding cash, with short-term Treasuries almost worthless, are fading fast. This is especially true when you factor in the enormous success that banks have had attracting deposits since the fall. Saving rates are up, net household debt has actually been reduced, and consumers are accepting the attractive CD rates most banks have offered to bring in deposits.

However, the math is not in favor of the banks for very long. Paying out 2% to 4% on teaser CD’s when the return on 6-month Treasury bills is almost zero will result in further bank operating losses, unless the banks start making loans. With $4 trillion (or $9 trillion depending on whose numbers you use) in cash on the sidelines, putting the money to work can create the results that allow banks to earn their way out of trouble like Buffett suggests.

Now the issue is, who wants to borrow money right now?