Investment banking windfall likely a one-off; bankruptcies expected to rise

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False hopes

“Wall Street’s top five banks posted their best quarter for trading in a decade after the coronavirus pandemic led to frenzied market conditions and radical interventions from central banks,” the Financial Times reports. “JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup posted combined trading revenues of $33.4 billion in the second quarter, their highest tally since the $33.7 billion they made in the first quarter of 2010. The gains cushioned the blow of more than $20 billion of provisions for loan losses on the banks’ income statements.”

But executives are already warning of a sharp drop-off. Just hours after announcing his bank’s 80% rise in trading revenues from a year earlier, JPMorgan Chase boss Jamie Dimon suggested analysts could ‘halve’ that haul as a predictor for the rest of the year. Other executives agreed with the thrust of Mr. Dimon’s argument: this was a blowout quarter and unlikely to be repeated.“

Even what looked like good news wasn’t really,” the Wall Street Journal said. “Investment-banking revenue soared in the second quarter. But the gains didn’t come from advising CEOs on deals; rather, banks raked in fees helping companies stockpile cash to ride out the downturn.”

Financial Times

Too late

EY, Wirecard’s longstanding auditor, warned the defunct German payments company “that the draft of an independent audit report by KPMG lacked ‘context’ and could lead to wrong conclusions” about its business. EY “intervened just a day before the April publication of the KPMG report which raised doubts” about Wirecard’s business.

“KPMG had been unable to verify the existence of activities which, on paper, accounted for half of Wirecard’s revenue and all its operating profit. Two months later Wirecard collapsed after this third-party acquiring business (TPA), which was said to carry out payments processing for the company in countries where it lacked licenses to operate, was shown to be a sham.”

“The Wirecard scandal is another sorry example of regulatory failure in Europe,” an FT editorial says. “The response to events leading up to Wirecard’s insolvency by both BaFin, Germany’s financial regulator, and FREP, the under-resourced private-sector body that monitors German companies’ accounts, was lacking in the extreme. The decision of an EU financial watchdog, the European Securities and Markets Authority, to launch a fast-track investigation into Germany’s supervision of the collapsed payments group is therefore to be praised.”

“A better fix still would be to hand more power to the EU. As with money laundering, payments system scandals are often cross-border in nature. And most would admit that handing the reins for supervising the region’s largest and most complex lenders to the European Central Bank has led to a vast improvement to what went before. It would be naive to view any system of financial supervision as impenetrable, but cutting national ties ought to help create a fairer and safer system of oversight.”

Motive unknown

The son of a federal judge overseeing a lawsuit against Deutsche Bank linked to the late financier Jeffrey Epstein was shot and killed at their home in New Jersey by a lone gunman. The judge’s husband was also injured in the attack.

Judge Esther Salas “had been assigned to oversee a lawsuit filed by investors against Deutsche Bank. They alleged that the bank had made false and misleading statements with regards to its anti-money laundering practices and had improperly monitored high-risk customers including the late Epstein. Authorities have not linked the shooting to the Deutsche Bank case.”

Off to the cloud

“After years of foot-dragging, many banks have been abandoning their cautious approach to cloud-based services and signing up with gusto to outsource their storage of data and other activities that demand high-intensity computing power. In the past few days alone, Amazon Web Services struck a big new deal with HSBC while Google announced partnerships with Goldman Sachs and Deutsche Bank.”

New York Times

Calm before the storm

“Instead of a stampede to the bankruptcy courts, personal bankruptcy filings dropped sharply from April through June, even as unemployment soared,” largely due to the federal government’s stimulus package. “But those benefits are set to expire this month. Congress will take up the issue of whether to extend them, along with other emergency aid, when the Senate returns next week, but if no more aid is forthcoming after July a far more dire portrait of the financial pain of millions of Americans is set to emerge in the coming months. Bankruptcy experts say consumer bankruptcy filings will then start to rise.”

“The banking industry is already gearing up for a wave of defaults on everything from mortgages to credit card debt. Several of the nation’s biggest banks, including JPMorgan Chase, Wells Fargo and Citigroup, said in their second-quarter earnings reports that they had added tens of billions of dollars to their reserves to cover losses they expect to incur on business and consumer loans.”

Getting closer

The Senate Banking Committee is expected to approve Judy Shelton’s nomination to the Federal Reserve on Tuesday, “putting her one simple-majority vote in the full Senate away from confirmation at a moment when the central bank is employing vast powers that she has a track record of questioning. While her nomination seemed shaky in the wake of her mid-February Banking Committee hearing, Republican opposition has slowly crumbled.”

“Ms. Shelton’s bid can advance to the full Senate without any support from the 12 Democrats on the committee so long as all 13 Republicans back her. Her nomination will come to a vote alongside that of Christopher Waller, the research director at the Federal Reserve Bank of St. Louis, [who] is expected to clear the committee easily.”

Washington Post

Forgive, or not to forgive

“Treasury Secretary Steven Mnuchin suggested Friday that the government should consider forgiving all taxpayer-backed small loans under the federal Paycheck Protection Program without verifying how the funds were used, a decision that could wipe away debt for millions of small businesses but would also substantially increase the risk of fraud.

“One of the things we’ll talk about is should we just have forgiveness for all the small loans … I think that’s something we should consider,” Mnuchin said at a House hearing. “We should obviously make sure there is some fraud protection.”

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