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Perfection at the Big Banks
Wall Street’s steps toward recovery and the Federal support driving the progress were clearly on display when it was reported that four of the largest U.S. banks registered trading profits on every single day of the first quarter. The strong trading results at Goldman Sachs (GS), JPMorgan Chase (JPM), Bank of America (BAC), and Citigroup (C) helped the banks record better-than-expected earnings in the period. A favorable environment developed throughout the quarter, as a depleted pool of competition and near-zero short-term interest rates were prevalent themes. Still, as a clear picture of the rarity of this 61-day feat, Goldman has never generated profits in every day of a quarter. In fact, 2003 was the last time JPMorgan could make such a claim.
For Goldman Sachs, it led to better-than-expected first-quarter earnings of $5.59 a share, a nearly 65% increase over the prior year's period. Not only did Goldman record a net revenue gain on each of the trading days in the quarter, on more than half the days in the quarter, gains exceeded $100 million, while they never once came in below $25 million.
The company does not break out what portion of trading revenues comes from proprietary trading, but COO Gary Cohn, commenting on Goldman's outstanding performance, argued that ``it [was] implausible that a proprietary [trading] driven business model could be right'' so much of the time. Mr. Cohn, instead, credited strong volumes in the company's global Fixed Income, Commodities, Currencies (FICC) and Equities market-making franchise.
The story was similar at Bank of America, JPMorgan Chase, and Citigroup, as trading revenues helped all three exceed share-earnings expectations in the March period. Quarterly filings with the Securities and Exchange Commission revealed that both BAC and JPM had ``perfect'' trading quarters. Although Citigroup doesn't disclose its daily trading revenues, all signals indicate that the bank can claim the same accomplishment
Net profits within Bank of America’s trading segment compared interestingly to the final quarter of last year. Indeed, BAC had trading gains of over $25 million on 16 of the March quarter's trading days. This compared to its performance in the December period of 2009 when it had positive trading revenues on 86% of the period's trading days, with gains over $25 million on 58% of the days. However, that came with losses that were greater than $25 million on 10% of the days, with the largest daily loss amounting to $90 million. The company indicated that the good trading performance in the recently ended March quarter was driven by more effective positioning and favorable market conditions.
As for JPMorgan Chase, the quarterly SEC filing showed that the company posted market risk-related gains on every day, with advances on nine days exceeding $180 million.
At Citigroup, this translated to a three-month profit of $0.15 a share versus the $0.18 loss it suffered in the prior year. Overall, the bank’s Securities and Banking unit’s revenues more than doubled to $8.0 billion, while operating income jumped nearly tenfold to $3.2 billion.
Although it is unclear as to what extent these performances were based on proprietary trading, the ``perfect quarter'' is likely to heighten scrutiny of the big banks’ trading activities and perhaps even bolster the case for instituting the ``Volcker Rule,'' which would ban proprietary trading for depository banks.