March presented the threat of a credit freeze along the lines of 2008.
Instead, the Federal Reserve’s efforts to keep debt markets flowing have things looking more like 2009, with concerns about the U.S. economy abundant but times still great on Wall Street trading floors.
The Fed’s moves have meant a $10 billion windfall for the biggest U.S. banks as their bond traders seized on big market swings to set new records, and their bankers arranged a slew of debt deals for companies desperate to raise cash. That helped keep JPMorgan Chase & Co. and Citigroup Inc. profitable despite a surge in loan-loss provisions, and even delivered a surprise earnings increase at Goldman Sachs Group Inc.
The market bonanza has for now eased fears about the type of bank capital concerns that fueled the last crisis and prompted government bailouts. But it also raises questions of whether the Fed’s efforts have disproportionately benefited financial firms rather than the small businesses still struggling with virus-driven lockdowns.
“Goldman’s earnings this quarter were too good -- almost indecent, in fact,” said Octavio Marenzi, chief executive officer of capital markets consultancy Opimas. “The Fed has been able to engineer a huge bounce-back in the markets by injecting trillions of dollars, benefiting investment banks primarily. This will lead to calls for the government to do more to help Main Street rather than Wall Street.”
The $10 billion figure is the gap between the $20.5 billion that the three banks generated from their fixed-income trading and debt underwriting units, and the $10.4 billion average quarter for those businesses over the last four years.
Citigroup’s investment bankers posted their best quarter since the financial crisis, helped by a 41% gain in debt underwriting revenue. At JPMorgan, the firm’s fixed-income traders generated $7.3 billion in the second quarter. That alone would have set a record for total markets revenue, even without the help of the firm’s stock traders.
Goldman boasted that it saw “significantly higher revenues” across all its major fixed-income trading business, particularly in interest rate, credit and commodities products. The group posted its best performance in nine years and topped analysts’ estimates by more than $1.5 billion. The bank’s shares climbed 0.9% at 11:46 a.m. as the major Wall Street firms all rose, including Bank of America Corp. and Morgan Stanley, which both report results Thursday.
“The activity levels that we saw at the end of March and April were really extraordinary,” Goldman CEO David Solomon told analysts on Wednesday. “In a period where there’s enormous change and enormous volatility in markets, we became super busy because our clients are super busy.”
Credit markets have enjoyed a healthy recovery from the virus-induced rout in March after the Federal Reserve promised to buy corporate bonds and other assets to unfreeze trading. U.S. companies responded by selling hundreds of billions of dollars of bonds in the second quarter to shore up liquidity as it became cheaper to borrow. And because corporate bonds tend to trade most after they’re freshly issued, the explosion in debt sales fueled a trading boom as well. Banks could also reverse some markdowns the firms had to take on corporate loans stuck on their books.
The performances are reminiscent of 2009, when credit markets began to recover from the previous year’s sharp declines and bank trading desks set records. That resulted in record profit for Goldman Sachs and allowed many of its Wall Street rivals to quickly rebound and repay their government bailouts even as the recession dragged on.
While the Fed has bolstered Wall Street operations, it has also taken steps to prevent large banks from passing along profits to shareholders, instead encouraging them to hoard capital that can be used to support lending through the pandemic. The central bank last month extended a pause on buybacks, capped dividends at the largest 33 banks at current levels, and forced some to cut payouts or boost capital ratios to maintain them.
The Fed also warned it might conduct an additional test on banks later this year that uses harsher economic scenarios, which could further limit firms’ payouts.
And the nation’s largest banks have cautioned investors that they shouldn’t expect the revenue boom to continue. Citigroup said trading revenue would “normalize,” while JPMorgan told analysts to expect declines in investment banking fees and warned trading revenue may be halved in coming quarters.
Underwriting volumes “will definitely come down,” JPMorgan CEO Jamie Dimon told analysts on a conference call on Tuesday. “All this capital is not being raised to go spend. It’s being raised to sit on the balance sheet so that you’re prepared for whatever comes next.”
The Fed has emphasized that its powers center around lending and its efforts to keep credit flowing are ultimately intended to save jobs. The U.S. government has doled out trillions of dollars in stimulus, much of it to individuals. That has boosted incomes even amid rising unemployment and helped stave off a spike in missed loan payments.
Still, U.S. banks spent much of the first half of the year battening down the hatches, with Citigroup, JPMorgan and Wells Fargo & Co. setting aside almost $50 billion to cover souring loans.
The lenders cautioned they might yet need to set aside more in provisions, depending on the pace and shape of the recovery of the global economy. Many states around the U.S. are seeing a resurgence in coronavirus cases after beginning to reopen earlier this summer.
“If somebody has the crystal ball, I would love to see it,” Citigroup CEO Mike Corbat told analysts on Tuesday. “I would certainly say that the unknowns outweigh the knowns.”
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