It's a good time to be one of America's largest banks. Actually, it's always a good time to be JPMorgan, Goldman Sachs Group, Bank of America, Citigroup or Morgan Stanley.
Whenever risky moves are taken that pay off, the rewards are handsome. And when risk leads to near failure, it matters not that the world economy goes into a tailspin and individual investors lose their shirts -- these too-big-to-fail institutions have their losses covered by taxpayers and go about their merry way.
The second quarter that just ended was very merry for the big banks. JPMorgan reported $6.1 billion in earnings. Bank of America had $3.6 billion. Citigroup was $3.9 billion, Goldman Sachs had $1.9 billion and Morgan Stanley eked out $980 million. The profits were as high as 70 percent more than the same period last year.
Still, banking analysts fear the second half of 2013 won't be as robust. Not with sluggish consumer borrowing, the end of the mortgage refinancing boom and pending new government regulations. While we concur with the first two concerns, we find the analysts' fear of the new rules' repercussions somewhat exaggerated.
It's been three years since the financial services industry's overhaul law went into effect. The law was intended to prevent another financial meltdown and federal bailout of banks.
Less than half of the regulations to be written have been adopted. Industry lobbyists have helped weaken many of them that have. And one of the law's centerpiece components, the Volcker Rule that would prohibit banks from trading for their own profit, might be finalized by the end of the year. Which means it might not, particularly since it's being fought by the large banks and members of Congress alike.
A companion component of the financial overhaul being fought by the industry was to have taken effect today. It would have given the Commodity Futures Trading Commission oversight over the lucrative derivative market the aforementioned big five investment banks are so active in. Or at least those derivatives traded overseas.
The new rule would require banks to keep more money on hand to cover potential losses. It also would force derivatives to be traded in clearinghouses, which would make the pricing on these exotic investments more transparent.
Seems reasonable enough legislation. Bad bets on financial products whose worth is determined by the value of an underlying asset -- coupled with lack of regulation -- was one of the leading causes of the crisis in 2008.
The derivatives market is huge, valued in excess of $700 trillion. The five big banks account for more than 90 percent of the market, and about half of the transactions take place outside of the U.S.
Almost predictably, the CFTC voted to delay implementation of new regulations for the foreign sector. Domestic oversight remains equally non-existent.
Why? We theorize it's because there is not enough money even in these oversized behemoths to cover potential losses. And the less transparent the market is, the more profits go directly to the investment banks. That's why they're fighting tooth and nail against the Volcker rule and any oversight of the derivatives cash cow.
It also explains why donations to congressional re-election campaigns continue unabated. Does Congress possess the will to lasso these too-big-to-fail institutions? Or are these banks simply too big to be denied?
Time will tell if the happy days keep going.
Editorial by Patrick Lowry