Once bailed out Wall Street investment bank Morgan Stanley reported a much stronger than anticipated rise in quarterly profit, boosted by higher revenue from trading bonds and equities.
“This was our strongest quarter in many years with improved performance across most areas of the firm,” Chief Executive James Gorman said in a statement. The numbers reported by the #3 Wall Street bank mirror those reported a week earlier by another formerly bailed out bank, Goldman Sachs.
Goldman reported first quarter earnings that were up 41% to $2.75 billion.
To get a sense of the obscene amount of money being made, the average Goldman employee made $130,000 – for the quarter. Yearly earnings were on target to be an average of nearly $500,000 at both Morgan Stanley and Goldman. JP Morgan, who also received a bailout, reported similar numbers.
Both the level of compensation and the sudden rise in earnings should trouble regulators and investors alike.
After their mismanagement had to be fixed by the average American taxpayer to the tune of 10s of billions of dollars, the banks sought to de-risk themselves. Or rather they were forced, reluctantly, to do so. Given the sudden spike in profits it appears this has not in fact taken place and that banks are once again playing high risk games and engaging in the moral hazard that got them in trouble around 2008.
The press release reads that “Morgan Stanley is focusing less on bond markets and more on managing money for the rich as a way to free up capital and comply with stricter regulatory requirements since the financial crisis”.
Yet the 60% spike in earnings came largely from trading, a high risk activity that has been aggressively regulated since the financial crisis. Banks are not longer allowed to bet their own money on securities (so called prop trading) and instead can only do so for clients. Yet its unlikely the dramatic rise in profits can be attributed to surge in client orders – clearly there is more going on deep inside the convoluted inner workings of the banks for these kind of results to materialize.
Specifically, the bank’s FICC (bonds and currencies) business, like those of its rivals, got a boost in the quarter after the Swiss central bank scrapped a cap on the franc, the European Central Bank announced its quantitative easing program and the U.S. Federal Reserve moved to tighten monetary policy. That’s the story anyway. What really happened is that the banks made the right bet on this outcome and it paid off. But they were still betting, taking risks that will inevitably come due and inevitably be covered by average Americans.
Investors ought to also take note of the extreme level of compensation at these firms. Despite being systemically important and highly regulated the banks still find elaborate and creative ways to pay themselves ever increasing amounts of money.
Would you want your wealth manager taking huge fees from your investment returns to pay themselves this handsomely? Or as an investor in these companies would you mind taking less dividends so that the managers of these companies can pay themselves like royalty? Food for thought both for main street Americans about to have an election and Elizabeth Warren, the sole crusader for accountability in the financial industry.