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Since the global financial crisis, Wall Street banks are more boring than they used to be. The rules imposed after the subprime-driven meltdown favor things like simple loans and deposits, require big capital buffers in case there’s another crash, and discourage activities like trading with a bank’s own money. The result is a safer financial system, according to the Federal Reserve (pdf).
And despite grumbles from bankers about the new restrictions, the industry remains plenty profitable. Five of the biggest banks in the US have now reported second-quarter profits, which add up to a bumper $20 billion.
Even so, shareholders thought some banks could do even better, and dumped their shares despite flat or rising profits. That’s even after the Fed signaled banks are healthy enough to give back much more cash to investors via dividends and buybacks.
One source of worry is a drop in revenue from trading things like bonds, stocks, and oil, a big earner in the past. To a certain extent, this is by design. Regulations like the so-called Volcker rule discourage banks from trading with their own money (the way hedge funds do). They can still do it, but as a service called market making. The idea is to help ensure an active market is available when investors want to make transactions, instead of trading purely for their own account.
If Wall Street banks were still making big directional bets with their own cash, they could make lots of money if they timed the markets right. But that’s not necessarily the case for market makers—if there’s less trading volume, and if price volatility is low, then there are fewer opportunities to make money from this business. Volatility has been at or near historic lows for much of this year.
Goldman Sachs was singled out for scrutiny by analysts because the money it makes from trading fell more than the rest of Wall Street. Goldman CFO Martin Chavez spent much of the bank’s conference call yesterday explaining the drop in sales from its commodities trading unit, which had its worst quarter since Goldman became a public company in 1999. Overall, he conceded that the bank could have navigated the markets better, but he suggested the decline was mostly down to clients trading less often.
Goldman, like the rest of Wall Street, has re-engineered parts of its business to fit the new, stricter regulatory regime. If the old Goldman sometimes resembled a hedge fund, the bank’s current incarnation has more of the features of a traditional bank, like consumer loans and deposits. That said, its stock-trading business did well in the latest quarter, and Chavez said the bank grew its market share in passively-traded assets, one of the hottest areas in financial markets.
And speaking of old-fashioned ways of making money, Wall Street banks are spinning more cash out of their wealth-management arms these days.
Although Wall Street banks’ share prices went on a tear after Donald Trump was elected, they have stumbled recently, as expectations that the president will rapidly roll back regulations have faded. JPMorgan boss Jamie Dimon declined to say he was frustrated with Trump when discussing the bank’s latest earnings, but he made it very clear he’s frustrated with America in general.
Even as safer, boring Wall Street banks still make billions in profit every quarter, relief from post-crisis regulations could be on the way. Goldman Sachs alumnus Gary Cohn is reportedly in the frame to take charge of the Fed, which would put ex-Goldman execs at the helm of both the central bank and Treasury Department. Randal Quarles, a former private equity exec and George W. Bush appointee, is also Trump’s planned nominee for the Fed’s banking watchdog, a potentially bank-friendly choice.