Banks turn to trading floor for profit

Citi, Goldman report earnings

Citigroup reported a $101 million profit in the quarter. Citigroup reported a $101 million profit in the quarter.
(Emmanuel Dunand/AFP/Getty Images
By Stevenson Jacobs
Associated Press / October 16, 2009

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NEW YORK - The big banks are showing they can still make money, even as Main Street struggles - though not from lending, refinancing homes, or other bread-and-butter business.

Instead, they’re doing what Wall Street does best - betting big on stocks, bonds, commodities, and other assets.

Citigroup, the shakiest of the major banks during the financial crisis, reported yesterday that it eked out a quarterly profit from trading, despite suffering more losses on consumer loans. Trading also drove big profits at Goldman Sachs and JPMorgan Chase.

That some banks are making money is a sign of remarkable recovery from the crisis of a year ago. But the lopsided business model raises questions about what happens if trading profits fall off and banks are left to rely on more traditional operations.

After all, the economy is still struggling to recover, unemployment is approaching 10 percent, and Americans are saving money and trying to pay down debt, not taking on more.

“The good news is that banks are in better shape. The bad news is that they’re not making loans to consumers and businesses,’’ said market analyst Edward Yardeni. “That could come back to bite them because these trading gains will only last so long.’’

For now, trading is pretty much the only way banks can make money. And it’s more lucrative because there are fewer competitors, interest rates are near zero, and government subsidies have allowed banks to borrow cheaply and invest in assets that offer the highest returns.

Goldman Sachs Group Inc. has benefited more than most. Famed for its trading prowess, the New York investment bank said yesterday that third-quarter earnings swelled to $3.03 billion, more than triple what it made a year ago.

As in past quarters, Goldman leaned heavily on its trading operation - buying and selling stocks, bonds, foreign currencies, and commodities like oil and gold - to make money.

“They’ve been on the mark on the trading side,’’ said Stephen Hagenbuckle, a principal at private equity fund TerraCap Partners.

Goldman’s strong showing came a day after JPMorgan Chase & Co. reported its own big profits - $3.59 billion for the quarter. That was even more impressive because, unlike Goldman, JPMorgan has suffered heavy losses on consumer loans like credit cards and mortgages.

But JPMorgan’s strong investment banking division is “carrying the burden right now,’’ banking analyst Bert Ely said. “If not for that, they would’ve lost money.’’

Goldman’s quick recovery allowed it to repay the $10 billion it received in government bailout money. That freed the company from restrictions on employee pay, which is on track to reach record levels.

The company said it set aside $16.7 billion, or nearly half its net revenue, through the first nine months of the year for compensation, which includes salaries, bonuses, and related costs.

Citigroup Inc., meanwhile, offered a grim reminder of just how shaky the economy remains.

Helped by trading gains, Citi reported a $101 million profit in the third quarter. But including the $288 million the bank paid out in preferred stock dividends, plus the deal that gave the government a 34 percent stake in the bank, it lost $3.24 billion.

The bank, one of the hardest hit during the recession, said loan losses during the quarter came to $8 billion. That’s down from nearly $8.4 billion in the second quarter, but a sign that people are still defaulting in large numbers.

Banks have warned loan losses will continue into next year.

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Citigroup Inc.