Bailed-Out Banks Raking In Big Profits
Friday, October 16, 2009
The nation's largest banks, preserved from failure by federal aid and romping in markets revived by federal aid, are racking up vast profits even as the broader economy struggles to emerge from recession.
While loan losses continue to mount, the banks are making it up on Wall Street, trading in stocks, bonds and other financial instruments, and collecting fees for services such as helping companies raise money.
Goldman Sachs and Citigroup reported third-quarter profits Thursday, joining J.P. Morgan Chase in outstripping the expectations of financial analysts and solidifying their places as among the banks that have benefited most from the government's massive rescue of the financial industry.
Goldman said it earned $3.19 billion between July and September, nearly the most it has ever made in three months, a record it set earlier this year. Citigroup, burdened by massive losses on loans and investments, managed a profit of $101 million largely on the strength of its investment bank.
The results have undercut conventional wisdom that the prosperity of banks depends on the prosperity of their customers. Generally, bank profits lag behind economic recoveries as banks wait for people and businesses to start borrowing again. But the federal government has reversed that relationship by investing more than $1 trillion in its efforts to prop up financial markets, seeking to revive the banks as a means of reviving the economy.
The banks also are benefiting from a survivor effect. There are fewer companies left on Wall Street. Lehman Brothers went bankrupt. Bear Stearns merged into J.P. Morgan. Merrill Lynch merged into Bank of America. Citigroup has been badly weakened.
"The best environment for Goldman Sachs is very, very strong global economic growth, and that's not what we're in right now. But you know, our market shares have improved, and I think we're getting a bigger share of a smaller pie," Goldman's chief financial officer, David A. Viniar, said Thursday.
The resurgent profitability has become a flashpoint for members of Congress and others concerned that Wall Street firms are plunging back into the high-risk practices that contributed to the financial crisis. Goldman, for example, reported that its "value at risk" in the third quarter, a common measure of risk-taking, increased by 27 percent over the same period last year.
Critics also are inflamed by the companies' plans to pay large bonuses at the end of the year, arguing that employees should receive smaller rewards for results achieved with government help. Goldman, for example, took $10 billion from the Treasury Department, which the company subsequently repaid. It borrowed billions more with the help of the Federal Deposit Insurance Corp. The company also borrowed from the Federal Reserve's emergency lending programs, although both the company and the Fed have declined to disclose the amount of aid provided. But the company said Thursday that it had set aside $5.35 billion, 84 percent more than last year.
J.P. Morgan said Wednesday that it set aside $2.78 billion to compensate its investment bankers, 28 percent more than last year.
Financial firms "have not come to grips with the fact that things have changed," Federal Reserve Governor Daniel K. Tarullo said at a Senate hearing on Wednesday.
The criticism has produced a change in tone at Goldman. Its executives increasingly have tried to underscore that the company's financial success is good for the broader economy.