SNL Financial has a characteristically solid report out analyzing Wall Street firms’ latest results, which trickled in last week.
One verdict to take away (although the analysts do not directly draw this conclusion): Wall Street could be smaller and more volatile. That’s not a good thing for New York City and State.
First, the bad news. Wall Street’s traditional bread-and-butter — fees from giving advice on mergers & acquisitions and other matters — is suffering.
At JPMorgan Chase, “[a]ll three of the investment banking fee businesses were down year over year, and advisory was also down when compared to the fourth quarter of 2011,” note SNL analysts Joe Mantone and Thomas Mason.
Second, the kinda good news. Mantone and Mason conclude that “the trading businesses from U.S. global investment banks bounced back in the first quarter from an abysmal fourth quarter” last year.
But the kinda good news is actually bad, too.
Giving advice and underwriting bonds is a relatively low-risk business (though not a no-risk business on the latter).
Churning out trading profits is as higher-risk business.
It’s not just the risk of holding assets; it’s the reputational and regulatory risk, too, of having to sell people stuff that may not be in their best interest to buy.
It’s telling that banks are becoming more reliant on this business even as regulators frown upon it.
To wit: the Volcker Rule, a part of Dodd-Frank, is set, in two years, to ban “proprietary” trading — that is, in-house speculation.
So why are banks doing more business that looks sort of like the prop-trading business?
They are desperate for something to do — and also, with interest rates at zero, they don’t have much choice but to do what everyone else is doing.
In the long term, the distractions this business line can cause, when lacking proper management, can drive bread-and-butter advisory clients away.
Yes, it’s hard ever to tell what’s really going on in the banks.
But from the outside, it’s hard to see this resumption of a pre-2008 development as good for New York. Banks are doubling down on a volatile, cyclical profit center even as a more staid part of the industry shrinks.
New York — at least as it is currently configured, to be too dependent on income-tax revenues — has no choice but to go along for the ride.