It’s easy to lose count of how many records Wall Street firms say they broke in the second quarter of 2020. Morgan Stanley’s revenue, Bank of America’s investment-banking income and JP Morgan’s trading profit all scaled new heights. These superlatives feed into a wider story about what happened as Covid-19 gripped the economy. In short, Main Street handed big financial firms an 11-digit gift.
Look at what happened to big banks during the quarter. Those who make money by buying and selling securities received a windfall as markets surged and the Federal Reserve propped up an ever-expanding array of investment classes. Morgan Stanley’s fixed-income trading revenue increased by 168 per cent from last year’s second quarter. Equity markets – which the Fed didn’t directly support – rose too, though James Gorman’s firm ceded its No. 1 position to Goldman Sachs for the first time in five years.
Ups and downs
But while some won more than others, everyone benefited. Along with JPMorgan, Citigroup and Bank of America, the big five raked in $35 billion of trading revenue in the quarter, according to Breakingviews calculations based on their filings. That’s $13.8 billion more than they reaped a year earlier. Underwriting fees grew strongly, too, as companies spewed out equity, debt and convertibles. Those increased by $3.5 billion.
As much as the Fed gave, it also took some away through lower rates. That affected big lenders like Bank of America – Brian Moynihan’s bank lost $1.3 billion of net interest income compared with a year earlier. Morgan Stanley, which does little banking, was basically unaffected. In aggregate, though, the big five ended up with $2.9 billion less interest income than they did in the same period of 2019. Bankers took away some of the profit too. In total, compensation rose by $3.9 billion.
Tot up the gains from markets, net out the losses from falling rates and pay, and the overall handout from the Fed was worth $10 billion. Unfortunately, that’s not exactly available to spend. In anticipation of customers being unable to service their borrowings, the five Wall Street giants set aside a whopping $20 billion to cover bad debt – twice what they made in other respects. It may come back to them, if borrowers can pay their bills after all. In the meantime, the Fed’s gift is only to be looked at, not touched.