Wall Street executives have been queuing up to explain how this summer’s market conditions were the worst in two decades or more. But, one wouldn’t think so if one were to judge by investment banks’ third quarter earnings. As a group, Bear, Stearns & Co. Inc., Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Morgan Stanley actually earned more than in the same period last year.
True, that’s only because Goldman Sachs did the heavy lifting. But, Lehman and Morgan, while subdued, were hardly disastrous. And even Bear Stearns, with its hedge fund blow-up, smaller balance sheet and greater reliance on US fixed income, still managed to turn a $170 million (Rs678 crore) profit. And that’s after the four collectively took some $6 billion of losses on loan and mortgage exposures.
It was a different story after previous crises. Back in 1994 Goldman, still privately held at the time, had such a bad run that its partners had to dig into their own pockets to recapitalize the firm. Four years later, in the wake of the Russian government default and Long Term Capital Management (LTCM) fiasco, the firm’s fourth quarter profits dwindled to $44 million and it postponed its IPO. Merrill Lynch reported a $163 million loss in the third quarter, rumours had Lehman facing insolvency, and trading losses at Bankers Trust Co. NA forced it to sell to Deutsche Bank AG.
There’s nothing quite so drastic this time around. Of course, all of them are bigger and more diversified than they used to be, even Bear. There are more ways to hedge positions, too. And there is one quirk in their favour. New fair value accounting rules allow Wall Street banks to mark declines in their own long-term debt liabilities as extra revenue. Only Morgan and Goldman provided much information—gains of $390million and less than $300 million respectively. But assuming a combined total of around $1 billion, that’s 5% of the groups’ revenue. Trading conditions have improved. This month, for example, Goldman sold some Leveraged buyout (LBO) loans either at or above the low quarter-end valuations. And that was before the Fed cut rates. Of course, that doesn’t mean their investment banking arms will post record results.
But what is supposed to have been the worst liquidity crisis in a generation doesn’t seem to have left anyone teetering on the brink.