Investment bank profits:
Over at Naked Capitalism, Yves Smith is outraged
at what's going on with bank profits and bonuses (and the Obama team's handling of the issue). It's a good read. Of special interest the description of how the investment banks made their money (taken from the BBC
First, what proportion of investment banking profits can be seen as an exceptional windfall, stemming from the unprecedented financial and economic support provided by governments and central banks to lessen a recession that was caused in large part by the recklessness of banks?
This question can be broken down into two parts.
(1) How much has been earned by what investment bankers style as a “carry trade” with central banks? This is the business of buying assets that yield 5, 6, 7 or 8 percentage points over the official lending rate, and then refinancing those assets with the central bank at that official lending rate. Borrowing at close to zero from the central bank and lending almost risk-free at 6 or 7% is not the most stressful or challenging way to generate bumper profits. Investment bankers tell me this carry trade has been happening on a system-wide scale, in spite of central banks’ precautions to prevent it.
(2) How much of the investment banks’ profits is the result of a generalised rise in asset prices, caused by the easiest monetary conditions for a century, which has led to a recovery in the price of securities that in the previous year generated spectacular losses for the banks? This gain from marking investments to the market price should not be seen to be the consequence of management genius, since the main reason the banks didn’t sell the securities in the previous year is that they were unsellable.
Bankers tell me that a vast proportion of all investment banks’ profits stem from these factors. It is visible in the sharp increases in revenues from so-called trading and principal investments – a doubling in some cases – which in turn is the main driver of banks’ overall profits growth.
There is an acknowledgement by some bankers that these gains are in effect an unrepeatable jackpot, the consequence of the authorities’ bail-out of the economy, and not the result of their great prowess.
Or to put it another way, only the generation of losses in these benign market conditions would require a very special talent. Making profits? A suited monkey could do it.
At RBS, for example, I am told that executives in its Global Banking and Markets division who have previously never earned more than £1m at the bank have this year been told they’ll be pocketing over £5m. And that a small number will be making over £20m.
Does Obama even understand the frenzy of looting going on on his watch, or is he doing it on purpose?
How much of the "profit" is just due to substituting "mark to market" with "mark to bonus" valuations of assets ?