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Jim Jubak

Jubak's Journal10/27/2009 12:01 AM ET

Why big banks hate banking

The stage is set for too-big-to-fail banks such as Citigroup and Bank of America to take on greater risks in pursuit of profits, counting on taxpayers to make good their losses.

By Jim Jubak

There have been no obituaries. No eulogies. No burial services. But this quarter marks the death of traditional banking at the big money-center banks.

What does the falling dollar mean for you?

What does the falling dollar mean for you?

Yes, we've seen amazing earnings reports from the likes of Goldman Sachs (GS, news, msgs) and JPMorgan Chase (JPM, news, msgs) this quarter, but their profits came from things like trading. From everything, in fact, but what you and I -- and certainly the preceding generation -- called banking.

And it's exactly those huge profits from everything but banking that have put the final nail in the big banks as banks.

Goldman Sachs and JPMorgan Chase and maybe Bank of America (BAC, news, msgs) and Citigroup (C, news, msgs), too, will survive as financial institutions. But they won't be banks.

The model for what these big financial institutions will be is laid out in the most recent quarterly earnings reports from Goldman Sachs and JPMorgan Chase.

Goldman Sachs, for example, blew through Wall Street projections when it announced third-quarter earnings of $5.25 a share, more than a dollar above the Wall Street consensus. Revenue climbed to $12.4 billion for the quarter, more than double Goldman's $6.04 billion in revenue in the third quarter of 2008.

Not bad for a recession, eh?

The money flow

Where did that revenue and ultimately those earnings come from? A lot of it -- about $6 billion -- came from trading fixed income, currency and commodities. Revenue from equities trading came to $2.8 billion. And the company booked a gain of $1.3 billion from the stakes it owns in companies such as Industrial and Commercial Bank of China (IDCBY, news, msgs). Put that all together, and about $10 billion of the bank's $12.4 billion in revenue came from investing its own money or trading either for clients or with its own money.

What's surprising about JPMorgan Chase's results for the quarter is how similar they are to Goldman's, even though JPMorgan is a financial institution with a huge retail banking and credit card operation. Goldman Sachs converted to bank holding company status only last fall so it could gain access to cheap money from the Federal Reserve. It has a negligible retail banking presence.

Yet if you dig down a bit, JPMorgan Chase made its money this quarter in exactly the same way that Goldman did: from investment banking and trading.

Traditional functions only a fraction

Now, the bulk of JPMorgan Chase's $29 billion in revenue comes from traditional banking functions. Credit card services ($5 billion in revenue), retail financial services ($8 billion) and commercial banking ($1.5 billion) together make up half of the company's revenue.

But these traditional banking functions didn't make up anything like half of the company's $3.6 billion in net income for the quarter. Card services showed a $700 million loss. Retail financial services produced net income of just $7 million on that $8.2 billion in revenue. And commercial banking recorded net income of $341 million.

That's a net loss of $352 million from the traditional banking businesses that produced $14.5 billion of the company's $29 billion in revenue.

Contrast that performance to the $1.9 billion in net income produced from JPMorgan Chase's investment banking business on $7.5 billion in revenue. Of that revenue, $5 billion, up by $4.2 billion from the third quarter of 2008, came from fixed-income trading.

Fixed-income trading added more to JPMorgan Chase's bottom line than all of its traditional banking business.

Can you blame them?

The CEOs at our biggest financial institutions didn't get where they are by passing up profitable businesses to focus on money losers. Bet nobody at Goldman or JPMorgan is going into meetings to argue for putting less money into trading and more into credit cards or retail financial services, especially if they paid any attention to the results reported by their less fortunate big-bank peers.

For example, Citigroup might have been able to offset some of the losses from its credit card business, just as JPMorgan Chase did, with higher revenues and bigger profits in investment banking and fixed-income trading -- except that the company's fixed-income revenue plunged 18% in the quarter from the third quarter of 2008.

At Bank of America, it's hard to reach any other conclusion than that the bank would have been just fine if it did less traditional banking and more investment banking and trading. For the third quarter, the company lost $1 billion on credit cards and $1.6 billion on home loans and insurance. Global banking showed net income of just $40 million on $4.7 billion in revenue. Global markets, however, produced revenue of $5.8 billion. About $4.4 billion of that came from fixed-income, currency and commodity trading. Net income on that $5.8 billion in revenue was $2.2 billion.

If only the bank did more of that trading and less banking, it might not have reported an overall $1 billion loss.

Continued: Meanwhile, over at Wells Fargo . . .

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Tuesday, October 27, 2009 3:01:39 AM

These Big Banks have to be broken up simular to what the Dutch are doing with ING.

 

 

Tuesday, October 27, 2009 5:00:54 AM

    I'd like to see the "big banks" fail, & more local banks take over. It would also be great to see credit unions prosper, which i think they will. It seems the big banks are really out to stick the american consumer, especially in the arena of credit cards.  I sure hope America wakes up, & starts using cash/debit cards, instead of credit cards. For these big banks to raise interest rates to 20-50 percent will bite them in the long run. I for one, are through with credit cards. 

 

  They rose my rates, & now they can eat my cards. I'm also a believer that the all important credit score, is a huge bank sham.  Our American way is so wrapped up in credit scores it's ridiculous.  Insurance companies, banks, mortgages, phone companies, the list goes on around the block. If, your credit is not a+, then we can stick it to you anyway we want,...& they are.

 

   So America..it's time to tell these big banks what they can do with their outrageous credit card rates. Abstain from cards, & pay cash, that way we can all stay out of debt, the banks will come crumbling back to earth, &  they now become so small, they could possibly FAIL.

 

  No more huge CEO $152 million pay packages...like  BOA's out going CEO. He's a smart man. Ruin a major bank, & then leave, laughing all the way to his own bank. All the while the US taxpayer bail their butts out, so they can't FAIL.

 

   I sure hope to see some day...BOA, CHASE, CITI, & some of their other pals bite the dust. Then there will be no excessive pay packages, to "retain talent".

 

      

Tuesday, October 27, 2009 5:19:33 AM

Elliot & BB,

 

I absolutely agree.  I am not even bothering to refinance my home because I will pay it off in about three to five years and will then be completely debt free.

 

We stand on the brink of some very exciting financial times.  Regulation of derivatives and questioning the pay structure of upper management are only the beginning of what we THE PEOPLE can do to stabilize our economy.  That's what FOX news (unfair and unbalanced) failed to understand about the pay 'cuts' to AIG upper management.  The fact of the matter is that the pay czar is simply requiring that 'bonuses' etc be tied to the LONG TERM best interests of the COMPANY, so any 'bonuses' would be in stock options of the bank that cannot be liquidated for a period of four years or more.  It is almost as if, DUH, this country is starting to realize that short term actions by the top 1% of the economy, with short term rewards, if allowed to go unchecked will result in this country becoming little better than a banana republic.

Tuesday, October 27, 2009 5:21:00 AM
Start clipping wings now!  Re-institute Glass Steagall, start breaking up large banks.  Draconian cuts to top management.  This insanity will put us in a Depression!  We've already wrecked our currency and looted the bank accounts and taxes of millions to prop these guys up.  If things start to improve even slightly, prices will soar.  They are already skyrocketing for essential services like food, transit fares, medicine.
Tuesday, October 27, 2009 5:54:17 AM
The big banks are using the bailout money to invest and drive the stock market up as of late.  There's no other reason for the market to be so bullish and these banks are making so much profit with the whole housing and credit cards issue haven't been resolve.  So get this straight....they are using American tax payer's money to invest to drive the market up (stealing) to make money from the more American tax payer.  Something is wrong here and it need to be fixed.  I don't want to leave my money in the bank and get 1% interest while they go out and risk my money in the stock market marketing 15% plus.  If the FED allow this to keep happening, this will destroy more american dreams of retirement, college funds, families, etc. 
Tuesday, October 27, 2009 6:24:30 AM
Simple solution. Move your money to a local community bank or local credit union. Any red blooded American that continues to do business with a "too big to exist" is part of the problem and not part of the solution. They can't play 3 card monty with your money if it is invested in your local community. Sure they are abusing the free money they are getting from the feds but that is going to dry up quickly once government wakes up and see's what is going on. When the free taxpayer and consumer deposit money is gone I guess they will have to play the markets with their own capitol. Now there is a novel idea.
Tuesday, October 27, 2009 6:53:25 AM

So the big guys at these institutions have to wait a little longer for their payday. There is still no incentive to stop manipulating the short term. The big banks Have a "get out of jail free" card, thanks to our elected officials. They will continue business as usual.

The one thing that would have resulted in real change was to let these "banks" fail.

Tuesday, October 27, 2009 7:04:08 AM
I think Jim just contributed to a night(or more) of restless sleep for me....but better to be informed than not...

Thanks for all you do Jim

Tuesday, October 27, 2009 7:24:02 AM
Lets keep it simple, When you "Plays" it too Cool, you "PLAYS it on out!" Bye, Bye Banks!
Tuesday, October 27, 2009 7:30:27 AM
I don't worry about my credit score.  Why?  I pay my bills in full every month.  If I need a loan I get it and then work on paying it off early.  My car is a 1998 Civic.  Sure I could afford better, but my self image isn't wrapped up in my car, plus I avoid the monthly payment.  The easiest thing in the world is to live within your means.  If that translates to older clothes, skipping a concert or ballgame, and staying in more often then so be it.  I'm content and not scared.

Now for the big banks who screwed us; goodbye.  My credit card is from my credit union.  I pulled all my money out of BOA and went with a local state bank.  The attention is magnificent.  The big boys are hosing consumers, but it will come around when more and more bail to credit unions and local banks.

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