Wall Street Takes the Profit Prize Again

The New York Stock Exchange (NYSE) Photograph by Peter Foley/Bloomberg

We’re coming up on the fifth anniversary of Wall Street’s meltdown. In the aftermath, we were told that the financial industry had become too big a part of the economy. It all brought to mind the advice of Martin Sheen’s character in the movie Wall Street: “Stop going for the easy buck and start producing something with your life. Create, instead of living off the buying and selling of others.”

So much for that lesson. The whole “buying and selling of others” thing remains quite profitable, thank you. Banks have rarely had it this good. According to Howard Silverblatt of S&P Dow Jones Indices, financials were the largest contributor to the earnings of the Standard & Poor’s 500 in the first quarter, and they are expected to repeat that showing in the second quarter. Earnings for financials, the second-biggest group in the S&P 500 after technology, soared 26 percent last quarter, more than any other industry, analyst estimates show. Housing is back. The stock market is at an all-time high. Investors are finally wiring in cash.

The 25 financial firms in the S&P 500 that have so far reported second-quarter results posted earnings totaling $31.6 billion, exceeding estimates of $29.1 billion, Bloomberg data show; the 8.7 percent “beat” is the widest margin of any sector. Finance is on track to surpass tech again as the most profitable industry in the country.

Dakin Campbell and Michael Moore report that first-half revenue at the six biggest U.S. banks climbed for the first time in four years. “Big banks are absolutely back,” Greg Donaldson, chairman of Donaldson Capital Management, told them. “The bleeding has stopped, and now they can spend time on figuring out how to make more money.”

Goldman Sachs, Morgan Stanley, Citigroup, JPMorgan Chase, Bank of America, and Wells Fargo reported $43.3 billion in total first-half profit, the most since 2007. According to Alison Williams of Bloomberg Industries, higher cash volume, rising prime brokerage balances, and better derivatives performance helped propel an average 32 percent gain in U.S. investment banks’ sales and trading revenue year over year, with Citigroup up 68 percent, Bank of America up 53 percent, and Morgan Stanley up 44 percent.

The S&P 500 Financials Index is up 26 percent this year, compared with the S&P 500′s 18 percent gain. Flush banks cannot sell their bonds fast enough: Almost 60 percent of high-grade debt sales in the U.S. this month are from banks, the biggest ratio in two years, according to Bloomberg.

“Banks are somehow making gigatons of money despite onerous new regulations and capital requirements,” writes HuffPo’s Mark Gongloff. “Why, it’s almost like they’re not telling the truth when they warn, repeatedly, that these new rules will destroy their profits and the economy.”

Last week, senators queried Federal Reserve Chairman Ben Bernanke on whether regulators were being tough enough on the biggest banks, with Ohio Democrat Sherrod Brown asking if profit gains show that stricter rules aren’t hurting financial institutions as much as their executives had warned. “It’s no surprise that mega-banks are doing quite well,” said Brown, who has co-introduced legislation to increase top banks’ capital requirements. “Yet they continue to claim that regulations—new regulations, impending regulations—are killing them.”

For Wall Street, it’s an embarrassing time to be so rich.

Before it's here, it's on the Bloomberg Terminal.