Nearly Half of Wall Street Bank Profits are Gone

The massive wealth and profits generated by the big Wall Street banks is draining away. Nearly half of the profit they earned over the last couple of years on the strength of mortgages, CDOs, etc. are gone. Massive write downs continue and the financial services industry looks like it will go through a period of downsizing.

The NY Times published an interesting article today that declared that:

"The numbers are staggering. Between early 2004 and mid-2007, a period of unprecedented wealth on Wall Street, seven of the nation’s largest financial companies earned a combined $254 billion in profits.

But since last July, those same banks — Bank of America, Citigroup, JPMorgan Chase, Lehman Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley — have written down the value of the assets they hold by $107.2 billion, gutting their earnings and share prices. Worldwide, the reckoning totals $380 billion, much of which reflects a plunge in the value of tricky mortgage investments."

The article then goes on to state that the financial services core business model and money making machine has been severely compromised by the credit crisis and credit crunch:

"Even when the losses end, bank executives are looking toward a new era of lower returns, thinner profits and fewer jobs. Greater scrutiny from regulators is forcing Wall Street firms to reduce their use of leverage, or borrowed money, which had fueled profits in good times but backfired when the credit crisis struck last summer. Nearly every finance company is cutting jobs and battening down.

“They are going to have to build a new business model,” Richard X. Bove, a financial services analyst at Punk Ziegel, said of investment banks. “I do not believe those businesses have the ability to generate the kind of profit they did in recent years without all the leverage.”

This parallels my own thinking, which I spelled out in a November 2008 article entitled Financial Companies Face $1.2 Trillion Risk.

It was clear that Wall Street profits were unsustainable and that the popping of the housing bubble was the catalyst for popping an even bigger financial bubble.  When Wall Street becomes an end as opposed to a means, there is trouble brewing.

What will this mean?

1. Fewer high paying financial services jobs as banks shed assets and positions.

2. Permanent lower valuations for banks and investment banks.

3. Higher long-term interest rates on credit products.



Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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  • JRodgers

    June 17, 2008

    It means all of the above and a New York real estate market that is going much, much lower.

  • Sam Cass

    June 17, 2008

    Probably so. Amazing that so many people made so much money off fictitious profits.

  • Give the money back

    June 18, 2008

    The only ones suffering are the shareholders. People need to realize that many companies are run by crooks. I no longer invest in the public markets because of this. Managers are not out to maximize shareholder value, but rather to line their own pockets.

    As the article shows, not even stock prices are a good indicator of executive effectiveness because profits can be manipulated. It took 4-5 years to figure out that what many of these banks were making was a sham.

  • Not Samuel Adams

    June 18, 2008

    A totally bankrupt country with no liberty and no justice for all.

  • Wall Street is Sick

    June 18, 2008

    The problem is Wall Street. I've run a company and had to deal with New York investment bankers. They don't care at all for helping companies. Instead, they want to make a quick buck via financial engineering, etc.

    "If we sell this piece, and cut here, and boost profits here, we can go public, or do a bond offering, etc."

    It's never about making the company better and generating any long term, lasting value. They are a bunch of sharks and they are getting what's due.

  • tightwad

    June 19, 2008

    Just amazes me that things like this are allowed to happen, and will continue to happen. Has greed and quick profit totally replaced common sense and good sound business?

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