Four of the largest U.S. banks, including Citigroup Inc., racked up perfect quarters in their trading businesses between January and March, underscoring how government support and less competition is fueling Wall Street’s revival.
Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc., the first, second and fifth-biggest U.S. banks by assets, all said in regulatory filings that they had zero days of trading losses in the first quarter. Citigroup Inc., the third-largest, doesn’t break out its daily trading revenue by quarter. It recorded a profit on each trading day, two people with knowledge of the results said.
“The trading profits of the Street is just another way of measuring the subsidy the Fed is giving to the banks,” said Christopher Whalen, managing director of Torrance, California-based Institutional Risk Analytics. “It’s a transfer from savers to banks.”
The trading results, which helped the banks report higher quarterly profit than analysts estimated even as unemployment stagnated at a 27-year high, came with a big assist from the Federal Reserve. The U.S. central bank helped lenders by holding short-term borrowing costs near zero, giving them a chance to profit by carrying even 10-year government notes that yielded an average of 3.70 percent last quarter.
The gap between short-term interest rates, such as what banks may pay to borrow in interbank markets or on savings accounts, and longer-term rates, known as the yield curve, has been at record levels. The difference between yields on 2- and 10-year Treasuries yesterday touched 2.71 percentage points, near the all-time high of 2.94 percentage points set Feb. 18.
It’s an awkward moment for the largest banks to be reporting more profitable trading. President Barack Obama is seeking to prohibit banks from trading solely for their own profit, a proposal favored by Paul Volcker, the former Fed chairman who is now a White House adviser.
“The banks are getting while the getting is good because you have regulatory reform and the Volcker rule and possible bank taxes down the road,” said Matthew McCormick, a banking analyst at Bahl & Gaynor Inc. in Cincinnati, which manages about $2.8 billion including bank stocks. “It’s statistically improbable to have three firms batting 1,000 and also pitching a perfect game. You wonder why the rest of America has some suspicion about proprietary trading.”
‘Implausible’ Proprietary Model
Wells Fargo & Co., the No. 4 U.S. bank, doesn’t disclose how many days it had trading gains or losses, said John Shrewsberry, head of the bank’s securities and investment group. Bank of America declined to comment beyond its filing, according to spokesman Jerry Dubrowski. JPMorgan also wouldn’t comment, spokesman Joseph Evangelisti said. Fed spokesman David Skidmore didn’t reply to an e-mail left after regular office hours yesterday.
At Goldman Sachs, which is contesting a fraud lawsuit from the Securities and Exchange Commission tied to the sale of a mortgage-linked security in 2007, net revenue was $25 million or higher on each of the days it traded. The New York-based firm said it made more than $100 million on 35 of those days, or more than half the time.
The company’s fixed-income, currencies and commodities businesses and equities unit generate those returns by making markets for clients rather than betting the firm’s own money, Chief Operating Officer Gary Cohn said yesterday at a financial services conference in New York.
“There is often speculation that proprietary trading revenues drive our outperformance in these businesses,” Cohn said. “Over the last 12 months, we have only recorded 11 loss days. It is implausible that a proprietary-driven business model could be right 96 percent of the time.”
The demise of Bear Stearns Cos., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. also helped surviving banks, said Benjamin Wallace, an analyst at Grimes & Co. in Westborough, Massachusetts, which manages $900 million and holds shares of Bank of America and JPMorgan.
“It was like a perfect storm for the fixed income market where you had very low volatility, tightening spreads and a buyer of last resort in the Federal Reserve,” said Paul Miller an analyst at FBR Capital Markets in Arlington, Virginia. “Even if a trade was going against you, you could just dump it on the Fed very quickly.”
The trading-powered gains may not last. At the end of March, the Fed wound up a program in which it had bought $1.25 trillion of Fannie Mae, Freddie Mac and Ginnie Mae home-loan securities. The purchases had helped drive debt buyers from U.S. mortgage bonds with government-supported guarantees and into riskier debt, helping banks that were holding or trading it.
The European debt crisis this month drove many investors back to safer assets, hurting prices for debt such as corporate bonds and commercial mortgage securities.
“The high level of trading and securities gains in the first quarter of 2010 is not likely to continue throughout 2010,” JPMorgan said in its filing.