A Great Quarter for Wall Street Comes at a Very Awkward Time



A bunch of Wall Street executives got together for dinner a decade ago while the U.S. economy was in tatters. Their industry, fresh off a bailout, was printing big profits again—and Americans were seething. Congress wanted hearings.

As the executives picked at their food, one fromGoldman Sachs Group Inc. turned to his peer from Morgan Stanley, which had been slower to bounce back from the crisis, and said: “You have no idea how damn lucky you are to lose money with a hopeless business model.” The table erupted in laughter. The kernel of truth in the quip is that nobody likes bankers profiting as the world burns. It draws a harsh spotlight.

This week, Wall Street’s five biggest investment banks disclosed $45 billion in revenue fromtrading anddealmaking units, marking those businesses’ best quarter in modern history. The catalyst: adeadly global pandemic and the Federal Reserve’s unprecedentedmeasures to prop up the economy.

It’s hard to imagine a more awkward time to land a windfall. For years, bank trading chiefs have been begging, even praying, for a surge in volatility to lift their fortunes by spurring client transactions. Banks finally got their score as markets plunged, with television screens showingrefrigerated morgue trucks. Then, they made even more money as authorities rushed to help.

Morgan Stanley posted its highest revenue and profit ever.JPMorgan Chase & Co. blew past the revenue record its traders notched in the first quarter—topping it by 34% in the second quarter. Goldman’s profit rose, even as the company set aside an additional $1 billion to cover potential legal costs, including its efforts to end international probes into its role in thelooting of a Malaysian investment fund.

The numbers were high enough that the ranks of sell-side stock analysts (sometimes mocked as cheerleaders for prefacing conference-call questions with “Great quarter, guys!”) wondered about the potential for a public backlash. “Fair or not, banks are being depicted as being on the wrong side” of economic inequality and other issues,UBS Group’s Saul Martinez said on the JPMorgan earnings call. “I’m just curious if you are concerned at all about populist, anti-bank policies gaining traction.”

At least the banks didn’t cause the crisis—unlike in 2008.

In recent years, banks maintained their extensive trading operations, even as low volatility in the markets made it harder for them to generate profits. One argument for keeping the units was that they can provide a hedge in crises, making money while other parts of the bank suffer from loan defaults and further damage from a slumping economy.

In fact, three of the Wall Street giants—JPMorgan,Bank of America Corp., andCitigroup Inc.—set aside much of the money generated by the trading bonanza so they can better weather anticipated losses on lending to desperate companies and consumers. Altogether, the five banks stockpiled more than $25 billion in the quarter.

Banks also are quick to note that the Federal Reserve didn’t step in to save them as it did in the last crisis. Instead, the banks helped head off another meltdown by helping companies raise money and avoid bankruptcy. “The most important thing we could do is be a healthy and vibrant bank through this crisis,” JPMorgan Chief Executive Officer Jamie Dimon said in response to the analyst.

The Fed may not have explicitly paid the banks billions of dollars, but it created an environment in which their success was all but guaranteed. The central bank helped cash-strapped companies raise money to shore up their finances and pay their bills. Banks made money by facilitating the fundraising, as well as on the related spike in stock and bond trading.

Bank executives say that such is the life of an essential middleman: You ride the waves as they come. But this turmoil happened to keep the music playing at banks after their most profitable year in history, in 2019.

“It’s always good to be a Wall Street bank,” says Greg Gelzinis, a policy analyst at theCenter for American Progress. “Whether we are in a recession” or not.

Beyond the worries over optics are deeper policy questions. How effective is the Fed’s stimulus in providing credit to critical industries, and how much lining of Wall Street pockets is acceptable as a side effect? When authorities intervene, can society win more than traders? What of the moral hazard in throwing a lifeline to companies that took on too much debt?

Fed Chairman Jay Powell has said indicated, in this moment, those concerns are secondary to saving the economy and millions of jobs. But Wall Street’s gains will only revive perceptions that the deck is stacked in its favor.

Representative Katie Porter (D-Calif.), who’s been jousting with JPMorgan’s Dimon for 15 months, couldn’t resist taking a shot after the bank posted results. Why, she asked, should Americans accept bankers becoming richer and richer in the middle of a pandemic?

Those sentiments can have big ramifications. The profits investment banks made in the wake of bailouts in 2008 spurred the anti-government Tea Party movement, the Occupy Wall Street demonstrations, and a wave of new regulation. Complaints that the game is rigged later played into the ascent of populism in the 2016 presidential election, and they reverberate today.

Banking leaders are well aware of the stakes. Some recently made it clear to their troops that they cannot be seen crowing.

If it weren’t for the pandemic, Chief Executive Officer David Solomon might have enjoyed the sight of a packed auditorium at Goldman, reacting to the best quarter under his leadership. Dimon would’ve strolled the aisles of JPMorgan’s Madison Avenue trading floors, personally saluting his workers.

Instead, Solomon met with a couple of dozen scattered executives in the hall in front of him. At JPMorgan, Dimon emailed employees a tightly worded “congratulations.”
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