MONEY Banking

2 Reasons to Chill Out About Huge Bank Profits—And 1 Reason to Get Angry

JP Morgan Chase, New York, NY
Mike Segar—Reuters

Little more than five years after the darkest point of the Great Recession, banks are again making record profits. Has the world no justice?

On Monday, the Wall Street Journal reported that banks earned more than $40.24 billion in the second quarter, the industry’s second highest quarterly profit in roughly a generation, just behind the $40.36 billion banks earned in early 2013. That may be infuriating to millions of Americans who lost their jobs and maybe even their homes in a recession due in no small part to Wall Street missteps, if not outright malfeasance.

But there are some reasons to take big bank profits in stride…even if they remain a long-term concern.

Other industries are also raking it in.

Record bank profits are making headlines. But that’s because Americans have developed such a disdain for bankers, not because bank profits are particularly extraordinary. In fact, corporate profits, which hit a record $1.7 trillion last year, are higher across the board.

Banks have certainly enjoyed their share of the pie. According to S&P Dow Jones Indices, financial services companies grabbed about 20.3% of all the profits posted by companies in the S&P 500 last quarter. At first blush a fifth of earnings may seem high. Indeed, financial services firms are the most profitable industry that S&P tracks, slightly ahead of technology, which contributes about 17.5% of S&P 500 profits. And unlike tech whizzes whose gadgets improve our lives, bankers don’t “make” anything.

But in the years leading up to the financial crisis, financial services accounted for a much bigger share of profits–at times more than 30%. In fact, today’s level is essentially in line with banks’ 20-year average of 20.2% of profits.

They’re making money on lending, not trading.

The other reason to feel relatively good about rising bank profits has to do with how banks are making that money. Monday’s Journal story emphasized that the jump in bank profits was tied to increased lending levels; commercial lending rose at an annualized 13% rate, while consumer lending climbed 6%.

That’s good news because lending is what we – even those among us who resent bankers – want banks to do. Lending helps businesses grow and helps consumers buy stuff, both of which ultimately help the overall economy. In fact the anti-banking crowd has been complaining that banks haven’t been doing enough lending. So they should take heart that that’s starting to change, even if it means banks are earning enviable profits in the process.

At the same time, the growth in lending contrasts with a still-tepid climate for another traditional profit line: trading. Placing bets–often with borrowed money–on different corners of the stock and bond markets was a huge profit engine for banks in the days before the financial crisis. But it made them riskier, and arguably had much less value for society than lending money directly to businesses. While the second quarter may have been good to banks overall, trading revenue at Wall Street’s biggest firms—Goldman Sachs Group Inc. THE GOLDMAN SACHS GROUP INC. GS 1.8272% , JPMorgan Chase & Co. JPMORGAN CHASE & CO. JPM 1.1712% , and Citigroup Inc. CITIGROUP INC. C 0.7586% —fell 14%, according to Bloomberg, which called the result “the worst start to a year since the 2008 financial crisis.”

The trend has a lot to do with calm stock and bond markets. But don’t count out the effect of new regulations like the Volcker rule.

But lessons have not been learned.

Of course, even with some big caveats it can still seem pretty galling that an industry that received billions in government bailouts less than a decade ago is so wildly profitable, if not quite as wildly profitable as it once was. You may be even more irritated when you consider that banks achieved these profits despite paying more than $60 billion in settlements and penalties since the 2008, which suggests they ought to have been asked to pay even more for their contribution to the crisis. And that Wall Street pay has bounced back almost as quickly as profits.

Then there’s the disturbing fact that the “living wills” submitted by the country’s largest banks—blueprints for safely winding down their activities in the event of another financial crisis—were just last week deemed inadequate by the Federal Reserve and the Federal Deposit Insurance Corporation. In other words, the banks are still “too big to fail,” so taxpayers could again be left holding the bag if the animal spirits get out of control again—and record profits have a tendency to make that happen.

Ultimately, the return to business as usual may, as Fortune recently suggested, give more ammunition to those in Washington who are still calling for stricter banking rules. But given the strength of the business lobby in Washington, don’t expect any miracles.

 

 

 

MONEY stocks

Stock-Pickers Can’t Keep Up With the Aging Bull Market

Running of the bulls
Simon Greenwood—Getty Images/Lonely Planet Image

The big companies favored by mutual fund managers have substantially underperformed the S&P 500 index this year.

Even fund managers’ best ideas are not working out this year.

In one sign of the poor performance of stock picking by fund managers as the U.S. stock market continues to rally, the largest overweight positions by large-cap fund managers substantially underperformed the broad Standard & Poor’s index over the first half of the year, according to a Goldman Sachs research report.

Those stocks which were the most shunned, meanwhile, posted above-average returns.

Visa, the most overweight position among the 485 large-cap funds included in the Goldman Sachs study, is down 0.4% for the year, while Exxon Mobil, the most underweight, is up 1.1% over the same period.

Overall, well-loved stocks gained 6% on average for the year through June, while the S&P 500 gained 8% over the same time. The most underweight stocks, by comparison, rallied by an average of 10 percent, according to the report.

The underperformance of active fund managers comes at a time when stock pickers were expected to prosper. The aging bull market, which began in 2009, and falling stock market correlations after last year’s big rally were supposed to make 2014 a time when fund managers would be rewarded for picking companies based on their fundamentals.

Yet poor stock selection is one reason why just one in five actively managed large-cap stock funds are beating the S&P 500 for the year so far. Typically, about 40% of managers best the S&P 500 over the same period, said Todd Rosenbluth, director of fund research at S&P CapitalIQ.

“What funds need to do to outperform is find unloved stocks and get in front of it. If they hold the same stocks that other managers are overweighting, then it’s more likely that they are just going to tread water,” Rosenbluth said.

Underweight stocks’ performance this year seems to bear that out. Shares of Goodyear Tire & Rubber, the company with the largest underweighting among consumer discretionary stocks, is up nearly 16% for the year to date, while shares of Essex Property Trust, the most underweight financial company, have rallied 32%.

Other companies with significant underweighting include Apple, PepsiCo, and Ventas, according to the Goldman report.

The lack of a significant market pullback could be another reason for the underperformance, Rosenbluth added. The S&P 500 has not had a pullback of 10%, known as a correction, in three years. That has made it hard for managers who sold during last year’s 30% rally in the S&P 500 to find places to invest their cash, he said.

“Some managers were prudent and sold during the rally, and now they are left wondering what to do,” he said.

TIME Companies

Google’s Blocking an Email Because Goldman Sachs Asked It To

Goldman Sachs Google Email Mistake
Goldman Sachs Group Inc. signage is displayed on the floor of the New York Stock Exchange in New York, U.S. Bloomberg/Getty Images

Google is blocking a user's access after Goldman accidentally sent a confidential message to the wrong person

Google is blocking a Gmail user from accessing a confidential message that was accidentally sent by a Goldman Sachs contractor, a Goldman spokesperson told Reuters Wednesday. The email, which contained privileged client information, was sent to a “@gmail.com” address instead of “@gs.com.”

The email snafu, which occurred on June 23, may have resulted in a “needless and massive” breach of privacy, Goldman told Reuters, leading the company to ask Google to block the message. A Goldman spokeswoman said Google complied with the investment bank’s request.

The e-mail, however, has not been deleted, an act which would require a court order, according to Google’s “incident response team.” Goldman accordingly filed a complaint on Friday in a New York state court in Manhattan.

“Emergency relief is necessary to avoid the risk of inflicting a needless and massive privacy violation upon Goldman Sachs’ clients, and to avoid the risk of unnecessary reputational damage to Goldman Sachs,” the financial firm stated in the court documents.

The contractor had been testing changes to the bank’s internal processes, Goldman said. The bank did not confirm how many clients were affected.

[Reuters]

TIME Books

Goldman Sachs Elevator Tweeter Loses Book Deal

The man behind a popular and rather infamous Twitter account that entertained many in the finance world but infuriated top execs at Goldman Sachs has lost his book deal after it was discovered that the ex-banker had never actually worked at the firm

The man behind the popular Goldman Sachs Elevator Twitter account has lost his book deal after it was discovered that the ex-banker never actually worked at Goldman Sachs.

Touchstone, a division Simon & Schuster, canceled its contract with John LeFevre, who was planning to pen “Straight to Hell: True Tales of Deviance and Excess in the World of Investment Banking,” Business Insider reports.

LeFevre landed the book deal in January, but the New York Times reported shortly after that the infamous Twitter author was never actually employed by the bank. The 34-year-old former bond executive previously worked for Citi.

“In light of information that has recently come to our attention since acquiring John Lefevre’s STRAIGHT TO HELL, Touchstone has decided to cancel its publication of this work,” Simon & Schuster said in a statement.

LeFevre said he was puzzled by the decision. “It’s just a comical mystery to me,” he told Business Insider. “As of Friday afternoon, after all of the noise—during which Simon & Schuster prohibited me from responding and defending myself‚they have continued to support me and stand by our project. Well, until today apparently.”

[Business Insider]

TIME Apple

Apple and Goldman Sachs Are Getting a Little Tighter

The Apple logo is pictured at its flagship retail store in San Francisco
Robert Galbraith—Reuters

It's good to be friends

Goldman Sachs says it appointed Apple Chief Financial Officer Peter Oppenheimer as an independent director, expanding the size of its board to 13. Goldman Chairman and Chief Executive Lloyd C. Blankfein said in a statement Monday, that Oppenheimer’s “25 years of broad experience across important industries will add a valuable perspective to our board.” Before being named as Apple’s chief financial officer, Mr. Oppenheimer’s roles at the company included serving as corporate controller from 2002 to 2004.

TIME Denmark

How Goldman Sachs Helped Tear Denmark’s Government Apart

Danish Prime Minister Helle Thorning-Schmidt at a press conference on Jan. 30, 2014 at the Prime Minister's office in Copenhagen.
Danish Prime Minister Helle Thorning-Schmidt at a press conference on Jan. 30, 2014 at the Prime Minister's office in Copenhagen. Keld Navntoft / AFP / Getty Images

Controversial deal to partially privatize state energy company split Denmark's governing coalition

Danish Prime Minister Helle Thorning-Schmidt scraped together votes Thursday to partially privatize the country’s state-owned energy company, but the controversial deal has fractured her governing coalition.

The dispute over the deal prompted the Socialist People’s Party to quit the prime minister’s center-left coalition earlier in the day, Reuters reports. “It has been a dramatic 24 hours,” Socialist Party leader Annette Vilhelmsen said as she made the announcement. “We do not wish to be part of a government at all costs.”

The deal allows a group of investors headed by Goldman Sachs to buy an 18 percent stake of Dong Energy for $1.5 billion, as part of a broader restructuring that will cut the utility’s costs, reduce debt and increase energy investments, according to Bloomberg.

The sale proved especially divisive because of a provision that would give Goldman Sachs veto powers in key areas like management changes. It was opposed by 68 percent of Danes in a recent poll, and thousands of protesters assembled outside the Danish parliament building on Wednesday.

Vilhelmsen had expressed optimism Wednesday she could unite her party around the prime minister’s plan, but was unable to overcome a staunch opposition. Vilhelmsen also said she will be resigning as the party’s leader.

The withdrawal of the Socialist People’s Party from the governing coalition is a major blow for Thorning-Schmidt. She’ll hold on to power for now, since the Socialist party will continue to support the government from outside the coalition, according to Vilhelmsen.

But a poll released Friday indicates that 54 percent of Danes believe the prime minister has been weakened by the Socialists’ exit.

“The Goldman angle will be forgotten in a few weeks time,” Jens Hoff, a political science professor at University of Copenhagen told Bloomberg. “What remains will be that the Socialist People’s Party left the government.”

[Reuters]

MONEY

Is Goldman Too Big to Obey the Law?

In the wake of Friday’s civil fraud complaint filed against Goldman Sachs, the blogosphere has had all weekend to reflect upon the implications of the news. Here’s some of the best commentary:

  • “Wall Street has gotten a lot of mileage,” notes Ezra Klein, “out of the accusation that the political system simply doesn’t understand how Wall Street works. And that’s, well, correct. The problem is that Wall Street also doesn’t understand how Wall Street works.” [Ezra Klein]
  • It’s not just that banks have gotten too big to fail. As the Goldman case is making clear, they’ve gotten too big to obey the law. [The Baseline Scenario]
  • Reluctantly coming to Goldman’s defense, Jeff Matthews finds Exhibit A: Evidence that the bank’s alleged victims in this deal weren’t quite so innocent. Goldman, he writes, “did not, it would seem, drag them kicking and screaming. More like skipping and singing.” [Jeff Matthews Is Not Making This Up.]
  • Even so, there’s a real threat to Goldman here: All the additional dirty laundry that could be aired during this case’s discovery process. [Matthew Yglesias]
  • Finally, Barry Ritholtz comes up with a provocative baker’s dozen worth of questions that the SEC’s actions raise. Such as Question #11: “What does this mean for ‘Government Sachs’? Might GS see their privileged positions within Governments (US and others) curtailed?” Discuss. [The Big Picture]

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MONEY

Why the Goldman Charges Could Hasten Financial Reform

The Securities and Exchange Commission’s civil fraud charges against Goldman Sachs will no doubt help stoke populist anti-Wall Street sentiment. But the specifics of the complaint, if they turn out to be true, are also a blow to the intellectual underpinnings of anti-regulatory philosophy. And it could give Democrats the advantage in pushing their financial reform measures over the top.

Wall Street has looked pretty foolish over the past three years, but there was a certain comfort in knowing that there were a few smart guys who took the right side of the trade. Like hedge fund manager John Paulson, who became famous for his winning “short” position on mortgage securities.

As long as there are people like Paulson willing to bet against market euphoria, the argument goes, markets should be able to regulate themselves, at least most of the time. People won’t be able to sell dubious securities for very long, because the shorts will hop in to make a profit and in the process bring that stuff down. Maybe there weren’t enough Paulsons to prevent the “hundred-year flood” that led to this financial crisis. But the fact that there were a few suggests that the system basically works, and just needs some tweaking at the edges — maybe just some more transparency.

But what if, as the SEC charges, the guys who make the toxic stuff are working with the ones who bet against it? The complaint says that Paulson’s fund wasn’t merely taking the other side of the bet. As Fortune.com explains,

The SEC’s civil fraud complaint alleges that Goldman allowed hedge fund Paulson & Co. — run by John Paulson, who made billions of dollars betting on the subprime collapse — to help select securities in the CDO.

Goldman didn’t tell investors that Paulson was shorting the CDO, or betting its value would fall. When the CDO’s value plunged within months of its issuance, Paulson walked off with $1 billion, the SEC said.

Got that straight? According to the SEC, Goldman devised a financial product and sold it to investors without telling them that someone who had helped them devise that product was betting on its failure. In that scenario, it’s sort of like neglecting to tell a farmer that the hen house you sold him was designed by a fox.

Fortune.com notes that Goldman Sachs, in a statement, calls the SEC’s charges “completely unfounded in law and fact.” Earlier this month, the company devoted part of its annual report to shareholders to defending its role in the mortgage-securitization market.

Paulson and his firm aren’t named in the charges, an SEC official told the Wall Street Journal, because they didn’t have a duty to disclose to other investors. (Paulson, by the way, is not related to Henry Paulson, former Goldman CEO and former Treasury Secretary.)

We’ll see what happens. But as of today it’s a lot harder to argue that ruthless competition in markets makes regulation redundant. It’s ruthless out there, all right. But competitive? Maybe not so much.

By the way, if this happened the way the SEC says it did, it probably wasn’t unique. ProPublica and NPR’s This American Life broke a similar story last week about “the Magnetar trade.” It’s a ripping yarn. And there’s already a musical! This pretty much sums the mechanics, with a catchy tune:

Bet Against the American Dream from Alexander Hotz on Vimeo.

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