The latest out of Wall Street-land is a warning by analysts at Citibank that profits at Goldman Sachs and Morgan Stanley (and to a lesser degree at other banks as well) will show a sharp contraction for the second quarter of 2011. Leaving aside the inside baseball nature of one Wall Street firm issuing a negative report on other firms, the decline in profitability stands in contrast to the widespread perception that banks and investment houses are booming while the rest of the economy is suffering. Or does it?
At the beginning of the year, I wrote about the return of large bonuses and outsized profits at the nation’s leading banks. Though they are clearly generating lower profits than was the case in the boom years of 2006-2008, there is a world of difference between struggling banks and struggling people. Yes, major financial institutions are seeing lower revenues as global equity markets sag and fewer shares are traded in a period of uncertainty, and fixed income (bonds) has been less profitable with low interest rates globally and a decreased appetite for risk.
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But less profitable is still mightily profitable. Trading down more than 25 percent at Goldman for the quarter will still leave it with nearly $5 billion in revenue for those four months. J.P Morgan CEO Jamie Dimon made waves earlier this month when he complained to Federal Reserve Chairman Ben Bernanke about higher capital requirements for banks and the costs of larger webs of regulation and regulators. Underlying that challenge is Dimon’s sense (and that of many of his peers) that the more banks are constrained, the harder it will be to put capital in motion for an economic recovery to gather full steam. While Dimon’s points are well taken, there is a difference between banks being held back from how profitable they might be and how profitable they still are even in the face of such headwinds.
And on that score, banks are still immensely profitable. Goldman had revenue of nearly $40 billion in 2010 and $45 billion in 2009. Profits last year were $8.35 billion. Most of the major banks reflected similar numbers. Profits and revenue have been declining, but current profitability is about where it was in 2005, as the housing boom was inflating. So while it is true that major banks have fallen from their heights, they remain stratospheric.
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They also remain so in the context of an anemic economy and high unemployment, both of which are perceived as a product of decisions made and products sold by those very same banks. There, at least, I think the banks merit less criticism — but some criticism nonetheless. It took a wide range of bad decisions, greed and negligence on the part of multiple parts of American and global society to produce the financial crisis, and laying the blame on Wall Street alone lets far too many of us off the hook. But one reason for the continued animus toward the nation’s leading financial institutions is that they have weathered the storm with few of the consequences while many millions of Americans continue to suffer the fallout.
The irony is that lower profits – no matter how high in absolute terms – may provide Wall Street some breathing room politically. The leaders of these firms can now say as a matter of fact that they are seeing less business and that further incoherent regulation will only make things worse. They can point to global instability in the financial system stemming from the Eurozone and Greece as yet another headwind preventing aggressive lending in the United States — and within their framework, that is technically correct.
With Washington focused more on government debt, Wall Street may now be saved more stringent regulation simply because it is relatively weaker. Even so, it remains a cash cow of epic proportions. Whether that is laudable (as a sign of well-run franchises in a challenging time) or condemnable (as a sign of the wealthy getting wealthier in a challenging time), that simple fact should not be forgotten.
