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Banking or Trading?

Now that we have heard from all three of the large banks – Bank of America, CitiGroup and JP Morgan, we have a mixed picture.  JP Morgan had a very solid earnings announcement of $.82 per share versus an estimate of $.47.  CitiGroup slightly beat with a posted loss of -$.27 versus an estimate of -$.31 mostly due to an undeserved reduction in credit loss provisions. Bank of America came in this morning with a huge miss of -$.26 a share versus an estimate of -$.16.  The underlying loan quality of JP Morgan is showing through as it trounces B of A and CitiGroup, even though JP Morgan’s credit card unit swung to a $700M loss from a positive $292 a year earlier.

But despite all of the credit deterioration messes, all of the banks seem to be going crazy with trading profits.

Bank of America: Trading profits rose 57% over the second quarter to $3.4 billion.

JP Morgan: Fixed income trading revenue was $5B for the 4th quarter, accounting for 1/5th of the total $26B for the quarter.

And then we get to Goldman Sachs…unburdened by credit delinquencies or chargeoffs (are they truly a bank?), they are free to generate most profits from trading.  Although trading profits for Goldman were down slightly in third quarter, I think this chart shows the story:

Goldman, Trading their way to god-like status.

Goldman, Trading their way to god-like status.

Let us break this down quickly:  Banks have been given a license to steal by the Fed for a very long time now and some of the big boys are still losing money.  Banks can effectively borrow at 0% from the government (taxpayers) and lend out that money to consumers (taxpayers) at 6-25%.  Even though they were given this license to steal, where are they generating profits?  Through highly leveraged trading revenue.  What happens when credit spreads tighten in and equity markets hit their apex?  Then do they all start shorting the market?

You cannot make $5B in one quarter off of transactional Bid/Ask spreads in Fixed Income.  These banks are making speculative bets as revenue drivers.  What happens when there are not any bets left to make and they still do not want to lend to consumers in an economy with 10% unemployment?

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3 Responses

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  1. Angela says

    Hi Surly Trader

    Catch 22 situation really and not only that, these guys are liars anyway.
    These profits are not real, the old toxic debt is still there, just swept under the carpet until they can give it a name and sell it to unsuspecting investors.
    Thieves as far as l am concerned, full of crap. They havnt made a bean.
    Just different packaging.

  2. J. W. says

    I usually track all the earnings for the Fortune 500 companies at http://www.fortune500earnings.com. But for some reason the webmaster doesn’t update the website anymore. Any other sources out there that track and report earnings?

Continuing the Discussion

  1. Bank Losses Continue – SurlyTrader linked to this post on October 30, 2009

    […] seem like they have weathered the storm, but I think the issue is all about timing – can they earn enough with the steep yield curve and fixed income trading before the next wave of asset price declines continue?  I guess what I would like everyone to get […]



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