Tags: Gandel | banks | profit | JPMorgan

Fortune's Gandel: Big Banks Are Running Themselves Into the Ground

By    |   Wednesday, 08 October 2014 02:44 PM

Profits at America's big banks are down, but the orgy of fines paid by the too-big-to-fail crowd is only part of the reason why.

According to Fortune Senior Editor Stephen Gandel, the answer is easy: "The fat cats are still too fat."

As the big banks prepare to start unveiling their third-quarter profits next week, all apparently is not well.

The New York State Comptroller's office estimates profits at Wall Street firm slumped 13 percent to $8.7 billion during the first half of 2014 relative to the same period last year. The fall-off came despite surging mergers and acquisition (M&A) activity and IPOs that the Street feeds on.

Gandel noted much of the big fines lingering from the 2008 financial meltdown, such as JPMorgan Chase's $13 billion fine and Bank of America's $16.7 billion fine, were not even paid during 2014's first half.

"Wall Street is still reporting weak-ish profits — for Wall Street, that is — because they never really made the changes they needed to after the financial crisis."

The big banks are still relying on bond trading for their bread-and-butter profits, despite the fact interest rates have been at historic lows for years now, according to Gandel. As recently as the 1990s, Wall Street made more profit from M&A, IPOs and the stock market.

"And so the housecleaning that should have occurred never really happened. And as the financial crisis receded, the need for layoffs dissipated as well. As a result, Wall Street remains dependent on bond trading, so much so that a boom in its other businesses doesn't seem to matter."

Gandel stated that there are now 15 percent fewer workers on Wall Street than before the 2008 meltdown, despite the fact that profits are only half as much since then.

Goldman Sachs' return on equity (ROE) was once 30 percent, but has recently been closer to only 10 percent. Big banks will commence reporting third-quarter earnings next week, but the estimates "are not all that good" for the likes of former stalwarts JPMorgan, Bank of America and Morgan Stanley, he noted.

Gandel wrote that veteran Wall Street analyst Brad Hintz wrote in a downgrade of Goldman Sachs last week: "The trading businesses of Wall Street are generating returns well below their cost of capital. Even in the middle of an M&A rebound, still-buoyant debt capital markets and an equity underwriting boom, the aggregate ROEs of the banks are lackluster."

For Gandel, the bottom line is simple: Wall Street firms have done a poor job managing the changes in their own industry.

In an analysis of perennial top investment bank Goldman Sachs, The New York Times said Goldman has been losing its favored position among Wall Street analysts, with more now recommending Morgan Stanley and JPMorgan Chase ahead of Goldman.

"The company's executives are dismissive of the notion that it needs to be fundamentally reshaped — as many other banks have been — to be as successful as it was in the past," The Times stated.

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Profits at America's big banks are down, but the orgy of fines paid by the too-big-to-fail crowd is only part of the reason why.
Gandel, banks, profit, JPMorgan
Wednesday, 08 October 2014 02:44 PM
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