Bank Earnings Hugely Dependent Upon Trading
October 15, 2009
Money-Rates banking expert Richard Barrington called yesterday for politicians to take another look at the Glass-Steagall Act, a longstanding financial regulation that separated banking from investment activities, and was repealed in 1999 with the Gramm-Leach-Biley Act.
While this advice to politicians certainly makes extensive sense and might lower the risk of individuals holding money in money market accounts, savings accounts, and CDs, reinstating Glass-Steagall would also present giant problems to the big banks as they're currently constituted.
Making it illegal to mix banking activities with investment activities would present, first and foremost, the giant problem for big banks of:
Not even coming close to turning a profit.
As this story from the New York Times describes, JPMorgan, Citigroup, and Goldman Sachs all had pretty darn good third quarter earnings--but those earnings were largely due to profits from trading activities.
JPMorgan Chase, for example, generated $26.6 billion dollars in the third quarter from trading bonds, stocks, and derivatives. That was good enough for an 81 percent rise in revenues for that division versus last year.
Meanwhile, the consumer banking side of JPMorgan's operations, including deposit accounts and credit card lending, remains extremely troubled. The bank has set aside $31.5 billion to cover future losses.
It would be interesting to hear from Money-Rates readers--some of the most consistent savers around--whether or not traditional banking activities should or even can be separated from trading and investment activities at this stage in the game, given current bank business models.
Care to weigh in?
