By Binyamin Appelbaum
Washington Post Staff Writer
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.
Goldman's third-quarter earnings amounted to $5.25 a share, compared with $845 million or $1.81 a share during the same period last year. On a conference call held to discuss the results, Viniar told financial analysts that Goldman's outsized profit in recent quarters reflected the fact that it kept doing business during the worst of the crisis.
"We made prices when markets were volatile and extended credit when credit was scarce," Viniar said. "We took these actions because we knew we had an important role to play in supporting global capital markets."
Goldman and the other investment banks also have strongly defended their pay practices. Jamie Dimon, J.P. Morgan's chief executive, on Wednesday described his company's compensation plans as "right and fair."
In a modest nod to its critics, Goldman devoted a smaller share of revenue to compensation in the third quarter. Through the first nine months of 2009, Goldman spent 47 percent of revenue on pay, compared with 48 percent last year.
The public attention on Goldman and other profitable banks has deflected the attention of lawmakers and advocacy groups from the struggles of Citigroup, the company that has taken the most federal aid.
Citigroup got a total of $45 billion in direct investments from the Treasury Department. It has borrowed billions more with help from the Federal Deposit Insurance Corp., and it has tapped emergency aid programs operated by the Federal Reserve. This summer, the company sold a 34 percent stake to the federal government.
Citigroup said Thursday that it narrowly achieved its primary goal of remaining in the black for the third straight quarter. But Citigroup's results amounted to a loss of 27 cents per share of common stock, in part because it paid a dividend to preferred shareholders that was larger than its profits. The results compared with a loss of $2.8 billion, or 61 cents a share, during the same period last year.
The company said that the pace of its loan losses abated slightly in the third quarter, but analysts said it was too early to conclude the losses had bottomed out.