All bad things must come to end has been the hope of the banking industry for these past eight years. Now it seems that time has come. In the past week or so just about everything has been coming up roses for America’s banks. JPMorgan Chase delivered second quarter earnings that “beat the Street”, as Wall Street jargon would have it. Equity trading revenues (+27% year-on-year), investment banking fees (+4%), and core loans (+12%) combined with lower expenses to allow CEO Jamie Dimon to announce, chortle might be more accurate, “We’ve made good progress … including meeting regulatory requirements … adding to our capital … on target to deliver on our expense commitments.” Dimon, not known for his reticence, decided that with income inequality the stated concern of politicians ranging from Socialist/Democrat Bernie Sanders to right-winger Republican Ted Cruz, this is not the time to comment on reports that the recent run-up in JPMorgan Chase shares has catapulted him into the less-exclusive-than-it-once-was billionaire class, according to the Bloomberg Billionaire Index (yes, there is such an index). His $1.1 billion wealth is a snip compared with such as hedge fund entrepreneur George Soros ($28 billion) or Blackstone Group founder Steve Schwartzman ($13 billion), but then Dimon is merely an employee (“wage slave” in the jargon of the left) of his bank, rather than the founder/owner of a successful financial institution.
JPMorgan Chase’s success still leaves it playing second fiddle to Wells Fargo. The market value of the San-Francisco-based bank has leapfrogged that of Industrial & Commercial Bank of China, making it “the Earth’s Most Valuable Bank” according to The Wall Street Journal. Wells’ market value of almost $300 billion puts it $42 billion up on Citigroup and $120 billion ahead of Dimon’s JPMorgan Chase. It has not gone unnoticed by regulators that Wells has the simplest, most straight-forward business model of all large banks. No risky trading with borrowed money, few complex derivatives (one-tenth the value of those held at Citigroup and JPMorgan Chase), just some plain-vanilla mortgage lending and consumer banking. “It feels like a cleaner story,” says David Konrad, head of bank research at Macquarie group. It certainly does. In about the past 18 months Wells has not paid a fine over its residential mortgage-backed security business while Bank of America ($16.65 billion), Citigroup ($7 billion) and JPMorgan Chase ($13 billion) have handed billion-dollar fines over the government, bringing the total for the 20 largest banks to $235 billion in the past seven years, a few billion shy of the current GDP of Greece.
Citigroup has also joined the recovery parade. Its quarterly earnings were the highest in eight years, 18% above last year’s second quarter, thanks to cost cutting and lower reserves to meet expected legal costs. Not so for Goldman Sachs, which raised its reserve against the cost of future legal and regulatory woes from $284 million in the second quarter of 2014 to $1.45 billion. These charges resulted in a plunge in earnings, from $4.10 per share last year to $1.98 in the second quarter of this year. But revenues in both the important investment banking and equities divisions rose sharply, by 13% and 24%, respectively. And CEO Lloyd Blankfein, who told a congressional committee investigating the cause of the post-Lehman Brothers financial collapse that he is merely a banker “doing God’s work”, joined Dimon in the billionaire’s club. The value of his shares in Goldman has risen almost 300% since the bank went public in 1999, not bad since only seven years ago Goldman was forced to change its structure to become eligible for billions in government bailout funds.
That was then, and this is now – no longer any need for bailouts, which is a good thing since the last batch made voters so angry that it would take a politician braver than any now plying that trade to suggest such a solution. Barney Frank, retired from congress after co-authoring the Dodd-Frank reform law, said recently, “In America today can it seriously be argued that there would be overwhelming political pressure to bail out Goldman Sachs? It would be the other way around.”
With bailouts off the table, but too big to fail still a worry, the regulatory bandwagon rolls on. According to SNL Financial, the five largest banks – JP Morgan Chase, Bank of America, Wells Fargo, Citigroup and US Bancorp – control about 45% of the industry’s more-than $15 trillion in assets. They remain too big to fail. That is one reason a cloud no bigger than a woman’s hand hangs over the industry. Federal Reserve Board chairwoman Janet Yellen wants to make size and risk more costly. Last week the Fed ordered the eight “largest, most systemically important” bank holding companies to maintain an additional layer of capital to protect against losses, to force the banks to “bear the costs that their failure might impose on others”, in Yellen’s words. The added capital requirements are designed to make size and risk-taking more costly. Only JPMorgan Chase will have to raise additional capital, some $12.5 billion by the time the rule becomes fully effective on January 1, 2019, unless it chooses to shed additional businesses – it has already dropped about a dozen -- or lower its risk profile to comply with the new standards. Since capital requirements increase with the size of deposits, some major depositors are required to pay a fee to induce the bank to hold their cash.
Higher capital requirements have not stilled the voices on the left of the Democratic Party, most notably Massachusetts senator Elizabeth Warren’s, demanding a restriction on banks’ size and reconstruction of the wall between traditional lenders and investment banking that was torn down when then-President Bill Clinton signed a law repealing the Glass-Steagall Act. On Wednesday the so-called Volcker Rule, in general attempting to accomplish what Glass-Steagal once did, goes into effect, but until its practical application takes shape, we won’t know whether Fed regulations have already accomplished the rule’s intended purpose. Hillary Clinton is under pressure from the left-leaning constituency that dominates Democratic primaries and provides the door-step foot-soldiers during election campaigns to agree with senator Warren, and from big Wall Street donors to refuse. So far, Mrs. Clinton has avoided choosing sides, part of her current strategy to restrict her stated positions to defending “A black life matters” advocates and abortionists who sell the body parts of aborted fetuses, with specific statements on economic issues deferred until closer to voting time.
So banks are in better shape than they have been for a long time, and the banking system is safer and getting safer still. Oh yes, and borrowers will find fewer loans available as banks shrink to avoid the costs of the new rules.