[OPE] The profts in banking

Bailout Helps Fuel a New Era of Wall Street Wealth
By GRAHAM BOWLEY
NYT October 16, 2009

(...) How can some banks be prospering so soon after a
financial collapse, even as legions of people worry about losing their jobs
and their homes?

(...) Many of the steps that policy makers took last year to stabilize the
financial system - reducing interest rates to near zero, bolstering big
banks with taxpayer money, guaranteeing billions of dollars of financial
institutions' debts - helped set the stage for this new era of Wall Street
wealth. (...)

"All of this is facilitated by the Federal Reserve and the government, who
really want financial institutions to get back to lending," said Gary
Richardson, a research fellow at the National Bureau of Economic Research.
"But we have just shown them that they can have the most frightening things
happen to them, and we will throw trillions of dollars to protect them. I
have big concerns about that." (...) The strong are now able to wring more
profits from the financial markets and charge higher fees for a wide range
of banking services.

(...) A year after the crisis struck, many of the industry's behemoths -
those
institutions deemed too big to fail - are, in fact, getting bigger, not
smaller. For many of them, it is business as usual. Over the last decade the
financial sector was the fastest-growing part of the economy, with
two-thirds of growth in gross domestic product attributable to incomes of
workers in finance. (...)

With interest rates so low, banks can borrow money cheaply and put those
funds to work in lucrative ways, whether using the money to make loans to
companies at higher rates, or to speculate in the markets. Fixed-income
trading - an area that includes bonds and currencies - has been particularly
profitable. (...) Goldman Sachs and its perennial rival Morgan Stanley were
allowed to transform themselves into old-fashioned bank holding companies.
That switch gave them access to cheap funding from the Federal Reserve,
which had been unavailable to them. Those two banks and others like JPMorgan
were also allowed to issue tens of billions of dollars of bonds that are
guaranteed by the Federal Deposit Insurance Corporation, which insures bank
deposits. With the F.D.I.C. standing behind them, the banks could borrow the
money on highly advantageous terms. While some have since issued bonds on
their own, they nonetheless enjoy the benefits of their cheap financing.

Granted, banks are also benefiting from a stabilizing economy. The fear that
gripped the markets earlier this year, when doomsayers predicted a second
Great Depression, has largely dissipated. Stocks, corporate bonds, even
risky corporate i.o.u.'s - have all rallied from their bear market lows,
some spectacularly so. The Dow Jones industrial average has soared 50
percent this year, and touched 10,000 this week for the first time since the
crisis. Banks that had marked down the value of the assets on their books
during the dark days of the crisis are now enjoying a rebound in the value
of many of those assets. (...) As the number of banks has dwindled, the
survivors are moving into the void left by rivals that are either dead or
limping and unwilling to take risks.

A big reason for Goldman Sachs's blowout profits this year has been the
willingness of its traders to take big risks (...)
Banks that have waded back into the markets have been able to exploit large
gaps in the prices of various investments, a feature of the postcrisis
financial markets. The so-called bid-ask spreads - the difference between
the price at which banks are willing to buy things like bonds, and the price
at which they are willing to sell - are roughly twice what they were two
years ago.

Still, the newfound success is largely limited to the big securities houses
on Wall Street. (...)

Complete article
http://www.nytimes.com/2009/10/17/business/economy/17wall.html?_r=1&ref=global-home

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Received on Sat Oct 17 15:19:06 2009