No joy on Wall Street as big banks earn $63 billion
Four years ago Wednesday, President George W. Bush signed into law the biggest corporate rescue in American history. Even as U.S. unemployment has remained above eight per cent for 43 months, the country’s biggest banks are making almost as much as they ever have.
The combined $63 billion in profit reported by the six largest U.S. lenders over the four quarters through June is more than they earned in any calendar year since the peak in 2006.
Bank of America Corp. made more in the 12-month period than Walt Disney Co. and McDonald’s Corp. combined. Citigroup Inc., which like Bank of America took $45 billion in taxpayer funds, earned more than Caterpillar Inc. and Boeing Co. JPMorgan Chase & Co., the largest U.S. bank by assets, had profits of more than $17 billion even after reporting a $5.8 billion trading loss.
Still, Wall Street isn’t enjoying its good fortune.
Those billions of dollars in profits aren’t enough, according to interviews with more than a dozen bank executives and analysts. The lowest leverage in a decade, return on equity at a third of 2006 levels, higher capital requirements, shares trading below book value, declining bonuses, job cuts, the European sovereign-debt crisis and a backlash against bankers have damped the joys of profit, they said.
Dick Kovacevich, who retired as chairman of Wells Fargo & Co. in 2009, was in the men’s dining room of his San Francisco country club in July after the bank reported a $4.6 billion second-quarter profit.
A man there spoke to him, and not to offer praise for the best results in the firm’s 160 years.
“Wall Street was bailed out, and Main Street wasn’t,” he told Kovacevich, the 68-year-old banker said in an interview.
Wells Fargo and JPMorgan both broke profit records in 2011 and are expected to do so again next year, according to analysts’ estimates compiled by Bloomberg.
“While there are things to celebrate for the senior professionals in these institutions, sadly I don’t think they do much celebrating,” Ralph Schlosstein, chief executive of New York-based boutique investment bank Evercore Partners Inc., said of the biggest financial firms. “The challenge they face is how to adjust to this new capital regime, and the new regulatory regime, and to earn an adequate return on equity. None of them have yet broken the code.”
When JPMorgan, which earned the most of any of the six banks over the four quarters, decided to thank employees for their performance this year, it sent 161,680 individually wrapped buttercream-frosted, chocolate chip, oatmeal-raisin and sugar cookies to retail branches and call centres in the U.S., U.K., Philippines and India.
The gifts were delivered in May, two weeks after CEO Jamie Dimon announced what he called an “egregious” trading loss. The cost of the cookies, $130,000, equals about what the lender earned in 3.4 minutes the second quarter.
“We celebrate in a very low-key way,” said Gordon Smith, JPMorgan’s co-CEO of consumer and community banking.
JPMorgan gets more attention for the trading loss than for its profits, Schlosstein said, and “there’s an element of unfairness to that.”
Talk of unfairness to banks so soon after the financial crisis confounds Michael Greenberger, a former director of markets at the Commodity Futures Trading Commission.
“When the banks say, ‘We’re doing very well but not getting a return on our capital,’ it’s completely incomprehensible, and it’s angering to the average American,” said Greenberger, who teaches derivatives at the University of Maryland’s law school. “They’re making billions of dollars in profits. That’s the bottom line.”
The $63 billion profit for the 12 months ended June 30 was exceeded only in calendar years 2005 and 2006, when combined net income was $68 billion and $83 billion. While the latest figure is about half of what the six banks earned in 2006 when firms purchased during the financial crisis are included, they are still among the nation’s biggest money-makers. Fewer than 20 companies, including the banks, made $10 billion in the four quarters though June.
The six financial firms will have combined profits of $9.9 billion in the third quarter, $17.4 billion in the last three months of the year and $75.8 billion in 2013, according to estimates of analysts compiled by Bloomberg. The firms report third-quarter results later this month.
Banks have been forced to cut compensation to sustain earnings. Those costs fell at Morgan Stanley in the second quarter by about $1 billion from a year earlier to $3.63 billion. That reduction was bigger than the New York-based company’s $940 million pre-tax profit in the period.
Goldman Sachs said it will cut $500 million of expenses this year, mostly from compensation.
The six lenders announced at least 40,000 job cuts in the year through June, according to Bloomberg data.