July 17, 2020
Wall Street Reaps Huge Profits from Fed as Main Street Still Waits for Help
By Marcus Stanley and Andrew Park
Now that Wall Street is reporting earnings for a quarter that took place entirely during the coronavirus pandemic, it is clear that the Federal Reserve has bailed out the bankers quite effectively. Workers, families, small businesses, states, and municipalities have not fared nearly as well.
The Treasury and Federal Reserve took their experience from 2008 and rolled out the red carpet for the investor class. Their programs – which go well beyond what they did in 2008 – have supported financial and credit markets very effectively. In the meantime, over 13 million people have lost their jobs since March and many small businesses, especially ones owned by people of color, are still not receiving sufficient aid. And one financial behemoth – BlackRock – appears to be benefiting handsomely from its position as the de facto administrator of Fed aid.
As a result of the Federal Reserve and Treasury actions JP Morgan, Goldman Sachs, Citi, and Morgan Stanley have seen their trading desks pull in the highest revenue in years. JP Morgan’s bond traders set a new record in the firm’s history, with a whopping $7.3 billion in profits, double those of the second quarter of last year.
Goldman, across all its businesses, also celebrated its second most profitable quarter in history with $13 billion in revenue. Its employees did well too, as the firm paid $4.48 billion in compensation to its 39,100 employees, an average of $458,107 per employee over the course of the year.
Notably, the Federal Reserve has permitted major banks to pay out a large share of their earnings in dividends to stockholders, rather than reserving loss absorbing capital for the stresses ahead. Regulators are permitting banks to reward wealthy shareholders and executives even as bank chiefs themselves – like Citi CEO Michael Corbat – are warning that the worst may be yet to come.
Citi has paid 84% of its net income to its dividend and JP Morgan 60%. Wells Fargo, which lost $2.4 billion in the second quarter, will still pay a $411 million dividend in the third quarter, having already paid out an additional $2.1 billion in the second quarter.
These dividend payouts mean they are putting themselves in a weaker capital position, and risking undercapitalization if losses on their loans are higher than expected. And the boon in securities trading that many banks have been relying on to offset losses in their consumer-facing divisions may not last. JP Morgan CEO Jamie Dimon, for one, warned that trading revenue could fall 50% for the remainder of the year.
Massive asset manager BlackRock, which is buying various securities on behalf of the Fed, shows all the signs of benefiting handsomely from its very privileged position as administrator of Fed programs. (AFR documented the potential conflicts of interest here.) Blackrock does not engage in proprietary trading like banks do. But its privileged access to Federal Reserve programs likely helped them boost profits by 23% from the same period last year.
Today, it reported $100 billion in inflows, particularly into its iShares brand of fixed income exchange-traded funds – the same product BlackRock is buying on behalf of the Fed. And BlackRock outstripped investor expectations (something it almost never does) by reporting $1.2 billion in profit in the second quarter of this year.
Buoyed by Federal Reserve support, bank executives are paying themselves and their shareholders richly, rather than preserving capital to be able to weather a storm and continue lending to businesses in the real economy. And if real trouble for Wall Street comes in the form of a financial crisis, billions of dollars will be in the pockets of bankers and investors, unavailable to help weather the storm.