The stage is set for too-big-to-fail banks such as Citigroup and Bank of America to take on greater risks in pursuit of profits, counting on taxpayers to make good their losses.
There have been no obituaries. No eulogies. No burial services. But this quarter marks the death of traditional banking at the big money-center banks.
What does the falling dollar mean for you?
And it's exactly those huge profits from everything but banking that have put the final nail in the big banks as banks.
Goldman Sachs and JPMorgan Chase and maybe Bank of America (BAC, news, msgs) and Citigroup (C, news, msgs), too, will survive as financial institutions. But they won't be banks.
The model for what these big financial institutions will be is laid out in the most recent quarterly earnings reports from Goldman Sachs and JPMorgan Chase.
Goldman Sachs, for example, blew through Wall Street projections when it announced third-quarter earnings of $5.25 a share, more than a dollar above the Wall Street consensus. Revenue climbed to $12.4 billion for the quarter, more than double Goldman's $6.04 billion in revenue in the third quarter of 2008.
Not bad for a recession, eh? More from MSN Money and MoneyShow.comAre banks starving the recovery?Jubak on video: Break up the banks!7 lessons from investors' lost decadeJubak on video: The 2 kinds of banksWill US repeat mistakes of 1937?The money flow Where did that revenue and ultimately those earnings come from? A lot of it -- about $6 billion -- came from trading fixed income, currency and commodities. Revenue from equities trading came to $2.8 billion. And the company booked a gain of $1.3 billion from the stakes it owns in companies such as Industrial and Commercial Bank of China (IDCBY, news, msgs). Put that all together, and about $10 billion of the bank's $12.4 billion in revenue came from investing its own money or trading either for clients or with its own money.
What's surprising about JPMorgan Chase's results for the quarter is how similar they are to Goldman's, even though JPMorgan is a financial institution with a huge retail banking and credit card operation. Goldman Sachs converted to bank holding company status only last fall so it could gain access to cheap money from the Federal Reserve. It has a negligible retail banking presence.
Yet if you dig down a bit, JPMorgan Chase made its money this quarter in exactly the same way that Goldman did: from investment banking and trading.Traditional functions only a fraction Now, the bulk of JPMorgan Chase's $29 billion in revenue comes from traditional banking functions. Credit card services ($5 billion in revenue), retail financial services ($8 billion) and commercial banking ($1.5 billion) together make up half of the company's revenue.
But these traditional banking functions didn't make up anything like half of the company's $3.6 billion in net income for the quarter. Card services showed a $700 million loss. Retail financial services produced net income of just $7 million on that $8.2 billion in revenue. And commercial banking recorded net income of $341 million.
That's a net loss of $352 million from the traditional banking businesses that produced $14.5 billion of the company's $29 billion in revenue.
Contrast that performance to the $1.9 billion in net income produced from JPMorgan Chase's investment banking business on $7.5 billion in revenue. Of that revenue, $5 billion, up by $4.2 billion from the third quarter of 2008, came from fixed-income trading.
Fixed-income trading added more to JPMorgan Chase's bottom line than all of its traditional banking business.Can you blame them? The CEOs at our biggest financial institutions didn't get where they are by passing up profitable businesses to focus on money losers. Bet nobody at Goldman or JPMorgan is going into meetings to argue for putting less money into trading and more into credit cards or retail financial services, especially if they paid any attention to the results reported by their less fortunate big-bank peers.
For example, Citigroup might have been able to offset some of the losses from its credit card business, just as JPMorgan Chase did, with higher revenues and bigger profits in investment banking and fixed-income trading -- except that the company's fixed-income revenue plunged 18% in the quarter from the third quarter of 2008.
At Bank of America, it's hard to reach any other conclusion than that the bank would have been just fine if it did less traditional banking and more investment banking and trading. For the third quarter, the company lost $1 billion on credit cards and $1.6 billion on home loans and insurance. Global banking showed net income of just $40 million on $4.7 billion in revenue. Global markets, however, produced revenue of $5.8 billion. About $4.4 billion of that came from fixed-income, currency and commodity trading. Net income on that $5.8 billion in revenue was $2.2 billion.
If only the bank did more of that trading and less banking, it might not have reported an overall $1 billion loss.
Continued: Meanwhile, over at Wells Fargo . . .
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These Big Banks have to be broken up simular to what the Dutch are doing with ING.
I'd like to see the "big banks" fail, & more local banks take over. It would also be great to see credit unions prosper, which i think they will. It seems the big banks are really out to stick the american consumer, especially in the arena of credit cards. I sure hope America wakes up, & starts using cash/debit cards, instead of credit cards. For these big banks to raise interest rates to 20-50 percent will bite them in the long run. I for one, are through with credit cards.
They rose my rates, & now they can eat my cards. I'm also a believer that the all important credit score, is a huge bank sham. Our American way is so wrapped up in credit scores it's ridiculous. Insurance companies, banks, mortgages, phone companies, the list goes on around the block. If, your credit is not a+, then we can stick it to you anyway we want,...& they are.
So America..it's time to tell these big banks what they can do with their outrageous credit card rates. Abstain from cards, & pay cash, that way we can all stay out of debt, the banks will come crumbling back to earth, & they now become so small, they could possibly FAIL.
No more huge CEO $152 million pay packages...like BOA's out going CEO. He's a smart man. Ruin a major bank, & then leave, laughing all the way to his own bank. All the while the US taxpayer bail their butts out, so they can't FAIL.
I sure hope to see some day...BOA, CHASE, CITI, & some of their other pals bite the dust. Then there will be no excessive pay packages, to "retain talent".
Elliot & BB,
I absolutely agree. I am not even bothering to refinance my home because I will pay it off in about three to five years and will then be completely debt free.
We stand on the brink of some very exciting financial times. Regulation of derivatives and questioning the pay structure of upper management are only the beginning of what we THE PEOPLE can do to stabilize our economy. That's what FOX news (unfair and unbalanced) failed to understand about the pay 'cuts' to AIG upper management. The fact of the matter is that the pay czar is simply requiring that 'bonuses' etc be tied to the LONG TERM best interests of the COMPANY, so any 'bonuses' would be in stock options of the bank that cannot be liquidated for a period of four years or more. It is almost as if, DUH, this country is starting to realize that short term actions by the top 1% of the economy, with short term rewards, if allowed to go unchecked will result in this country becoming little better than a banana republic.
So the big guys at these institutions have to wait a little longer for their payday. There is still no incentive to stop manipulating the short term. The big banks Have a "get out of jail free" card, thanks to our elected officials. They will continue business as usual.
The one thing that would have resulted in real change was to let these "banks" fail.
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