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“As Good as It Gets”: Wall Street Eats Its Cake

A decade ago, Congress and the vox populi banded together to try to send Wall Street bankers to the clink and chasten the industry for a generation. How’d that go? Re-regulation made the industry stronger and richer than ever—just as the mob moved on to Silicon Valley.

Welcome to the new Golden Age on Wall Street. JPMorganChase, our biggest bank by nearly every measure, is pumping out $40 billion in profits a year, and its formidable chairman and C.E.O., Jamie Dimon, told me recently that he sees no end in sight to the machine’s ability to generate the majority of those profits. In its recently announced third-quarter, the bank made a profit of $11.7 billion, which includes a $2.1 billion reversal of Covid-related loss reserves that the bank believes are no longer applicable. The bank also has another $20 billion of accrued reserves on its balance sheet that could be reversed and brought back into earnings if the economy continues humming.

These are astounding numbers, to be sure. On an annualized basis, it’s not inconceivable that Dimon’s bank could be earning more than $45 billion a year. Let’s put that into perspective: Apple, on any given day the world’s largest company with a market capitalization of $2.5 trillion, had net income of $86 billion in the 12 months ended June 2021. “Credit continues to be quite healthy, in fact, net charge-offs are the lowest we’ve experienced in recent history,” Jeremy Barnum, the bank’s new chief financial officer said last week. No wonder the JPMorganChase board of directors is doing everything it can to keep the 65-year-old Dimon around for at least another five years.

The rest of Wall Street is performing well, too. Goldman Sachs earned $5.4 billion in third-quarter profit, and has made nearly $18 billion in profit in the first nine-months of the year. The firm’s year-to-date, pre-tax earnings margin—how much of its revenue becomes profit—is an astounding 47 percent. That means that nearly half of every dollar of revenue that Goldman Sachs has received so far in 2021 became profit! Wells Fargo’s Mike Mayo, the dean of Wall Street research analysts, is even more impressed by the higher profits Goldman is making on the marginal dollar of revenue—but that’s a tad wonky.

Under David Solomon, its relatively new C.E.O., Goldman has become a profit machine, reminiscent of the days when it was an incredibly lucrative private partnership. (Not to be outdone, JPMorganChase’s third-quarter pre-tax profit margin was also 47 percent; the Big Banks are fairly minting money.) 

Meanwhile, Morgan Stanley’s year-to-date earnings are $11.4 billion, up 47 percent from the same nine-month period in 2020. Bank of America’s net income for the first nine months of 2021 was $25 billion, double the profits the bank made in the first nine months of 2020. Meanwhile, over at Citigroup, the new C.E.O. Jane Fraser has presided over $4.6 billion in third-quarter profits.

Then there are the billions in profits being raked in by Wall Street writ large, a universe that includes the big private equity firms, such as Blackstone, KKR, Apollo, Carlyle, and TPG (an investor in Puck), plus the vast world of hedge funds—like those managed by Paul Singer, Bill Ackman, Dan Loeb, Ray Dalio and Ken Griffin—and the shadow banks, such as Ares Capital, Owl Rock Capital, and Golub Capital, among others. Not for nothing is Steve Schwarzman, the co-founder of The Blackstone Group, now worth some $36 billion, according to Bloomberg, up $15 billion, and 71 percent, so far in 2021. 

Life is good—very good—for the crowd that makes money from money. An August report from Johnson Associates, a Wall Street compensation consulting firm, estimated that Wall Street bonuses would be up between 25 percent and 35 percent in 2021, to the highest levels in about a decade. Mayo is impressed. He’s never seen financial markets this robust in his thirty-plus years covering Wall Street. “It’s certainly ‘stronger-for-longer’ capital markets,” he told me. “I don’t think we found anybody extrapolating current results in perpetuity. But the federal government has released a bazooka between monetary and fiscal policy, and G.D.P. growth is accelerating. The risk appetite is up. C.E.O. confidence is higher. This is the moment for Wall Street.”

This is all quite a turn of events from the desperate days of the 2008 financial meltdown, when one Wall Street bank after another teetered on the edge of bankruptcy, liquidation, or irrelevance. In the wake of that crisis, Wall Street executives complained bitterly that Washington’s new regulatory regime would constrict their ability to conduct business as usual, which, of course, was entirely the point. There was plenty of hue and cry about the establishment of the Financial Stability Oversight Council, the need to produce “living wills,” the creation of the Consumer Protection Financial Bureau, the implementation of the Volcker Rule and the regulation of most derivatives. There was the intense belly-aching caused by increased capital requirements and the forced sale, to third-party investors, of nearly every asset on the balance sheet that wasn’t nailed down, such as leverage loans, mortgages and anything else that could be packaged into a security and sold off. 

But, instead of thwarting Wall Street, the so-called Dodd-Frank Act has allowed the big banks to clean up like never before. Why did so many people—the legislators hoping to curb Wall Street excess and the Wall Street executives in the crosshairs—get things so wrong? Why has Wall Street been able to thrive, largely free of criticism, even with the hated new regulations? Most of the answer lies in an unforeseen and lucky confluence of events.

There is, for one, the unavoidable fact that the big banks that survived the 2008 financial crisis and subsequent government bailouts can now effectively operate as a powerful cartel, giving them an important share of nearly every debt and equity underwriting, loan syndication, securitization, and much of the secondary trading of securities. (Mayo agreed that this is one of the “unintended consequences” of Wall Street re-regulation.) There is more competition for Wall Street on the M&A front, it’s true, given the success and proliferation of M&A boutiques, such as Lazard, Evercore, Moelis, LionTree and Centerview Partners, but it has also been nearly impossible not to give the big Wall Street banks a piece of the M&A action, especially if a company wants or needs access to financing from the Big Banks, which almost every company does. And it goes without saying that the big Wall Street banks continue to dominate the M&A “league tables” year after year. The leading three M&A advisors so far in 2021 are Goldman Sachs, JPMorganChase, and Morgan Stanley, in that order, according to the Financial Times. Incidentally, I didn’t even have to look to know that’s how the rankings would be. The big Wall Street banks have more capital, more market power, and less competition than ever before.

It’s no surprise, of course, that the disappearance of Lehman Brothers and Bear Stearns and the subsuming of Merrill Lynch into Bank of America would consolidate market power on Wall Street. But an even more dramatic consequence of the 2008 financial crisis from which the big banks have benefitted is the relative, ongoing and surprising marginalization of the European, Japanese, and Chinese banks from the competitive landscape. There are several European banks that are still swimming  in the investment-banking waters—among them Barclays, Credit Suisse, UBS and Deutsche Bank—but none of them are having the competitive impact that they had prior to the financial crisis, and one, Credit Suisse, has found new ways to get itself embroiled in one scandal after another. So not only are the big Wall Street banks facing less competition in the predominant U.S. market, they are also facing less competition globally, too, at the very moment that they have found ways to expand around the world to provide capital and advice to those who want it, and can pay for it, 24 hours a day. Just this week, for instance, Goldman took full control of its business in China, following JPMorganChase’s lead.

Then there is the Federal Reserve, which has bestowed on Wall Street the greatest gift of all: nearly free raw material from which it can make these gargantuan profits. Thanks to the Fed’s Quantitative Easing program, which started in 2009 and has been operative more or less since then, the assets on the Fed’s balance sheet have increased from $900 billion at the start of the financial crisis to nearly $8.5 trillion. By buying all sorts of debt securities, the Fed has increased the price of that debt and, correspondingly, driven down interest rates to their lowest levels in 4,000 years. If you are in the business of making money from money—as pretty much everyone on Wall Street is, except for M&A boutiques, which make money from advice—and the cost of that money is pretty much zero, or close to zero, it really is no surprise that Dimon and Solomon are rolling in profits these days.

Will these halcyon days last forever? A few weeks back, Dimon told me he does worry about competition, especially on the payments side of his business. He said he has concerns about Stripe, Square, Ant, American Express, Visa, and MasterCard. He said he even worries about how and when Google, Apple, Facebook and Amazon will enter the financial services fray. If he was of a mind to, I suppose, he could also worry about how cryptocurrencies are apparently  one day going to eliminate the need for a centralized banking authority altogether, in favor of DeFi, or “decentralized finance.” 

But I have my doubts. Sure, Dimon could worry—or maybe he just says he worries about up-and-coming rivals so that he keeps the spotlight off of Wall Street and on others. When was the last time you heard Elizabeth Warren, Bernie Sanders or Sherrod Brown focus their ire on Wall Street? Warren and Brown’s legislative initiative to break up the big Wall Street banks, the so-called 21st Century Glass-Steagall Act, has languished in legislative purgatory since it was introduced in April 2017. Which brings us to Wall Street’s additional piece of good luck: the power and influence of Big Tech—particularly Facebook, Google, Amazon, Apple and Microsoft—has eclipsed that of Wall Street for the time being, acting as a heat sink for any negative legislative, regulatory or media energy. 

The fact of the matter is that it’s just not going to get any better for Wall Street than it is now: its raw material is nearly free; its competition is quiescent, and its regulators and critics are focused on other things. It’s about as good a time as any for the top Wall Street executives to fortify themselves and their banks for the day when the weather changes and they are once again facing substantial headwinds. “If you were a butterfly,” suggested Mayo, “and you could be reincarnated as anything, at the moment you’d want to be reincarnated as a U.S. investment bank. This is about as good as it gets.”

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