Trading desks carry big banks; mad rush for relief funds
Receiving Wide Coverage ...
Boom in the gloom
The first quarter wasn’t kind to investors’ portfolios, but it was a “windfall” for Wall Street banks’ trading units. “Big banks’ trading desks posted their strongest results in years during the first three months of 2020—when the deepening coronavirus crisis wreaked havoc on the markets—buying and selling trillions of dollars’ worth of stocks and bonds, commodities and interest-rate products,” the Wall Street Journal reported. “The results were one of the few bright spots in otherwise bleak financial reports.”
“The results show how Wall Street has changed since the financial crisis. Today’s banks carry smaller inventories of securities than they once did. Wary of risk and regulatory snafus, they turn it over more quickly and don’t make the same proprietary bets they did before the 2008 crisis. That spared them from the worst of the declines in asset prices, and allowed them to profit by charging small fees on a surging number of trades and lending hedge funds money to finance their own positions.”
The lift from trading “helped cushion the impact of coming defaults,” the Journal added. “The sustainability of that boost will be hugely important, as the need to provision against credit losses will quite likely intensify. The universal bank model, in which Main Street and Wall Street business lines fire at different speeds at different points in a cycle, has performed well so far during this crisis. But it will face its biggest test in the months ahead. Some of the challenges coming may be things no banking model has yet contemplated.”
The market volatility caused by the coronavirus “was a moneymaking opportunity” for banks’ trading divisions, the New York Times commented. “But the chaos wrought by the pandemic, which has shut down businesses across the country and put millions of people out of work, has them setting aside billions of dollars to prepare for the defaults that lie ahead.”
An “unprecedented volume” of customers logging into their online bank accounts to check for government stimulus payments created a system overload at many banks on Wednesday. Customers reported trouble accessing account information at JPMorgan Chase, Citigroup, U.S. Bancorp, PNC and Truist, among others.
But some customers aren’t able to access that money because their bank took it first, due to their accounts being overdrawn for some other reason, the New York Times reports. “The phenomenon is swiftly becoming a political issue, with Treasury Secretary Steven Mnuchin fielding calls from senators urging him to ensure that relief money isn’t garnished. Banks are legally allowed to withhold funds that go into accounts that have negative balances, and no specific provision in the CARES Act, the $2 trillion relief package that authorized the stimulus payments, prevents banks from taking customers’ stimulus money to cover debts.”
Neel Kashkari, the president of the Minneapolis Fed, is calling on large U.S. banks to raise $200 billion in capital and prepare for the worst.
New York Times
“There are growing concerns that the Federal Reserve is ignoring the costly and painful lessons of the last crisis by allowing banks to continue paying dividends,” the Times warns. “Officials have loosened post-crisis rules put in place to ensure that banks had big enough financial cushions to continue lending. They have relaxed borrowing caps, encouraged banks to dip into their extra layers of capital and liquidity, and are offering up cheap funding programs, all in an effort to encourage banks to keep making loans.”
“Yet so far, policymakers have not stopped banks from continuing to pay dividends, allowing them to part with cash that could put them in a stronger position to continue serving as lenders and intermediaries should the unpredictable crisis deepen — though such curbs remain a possibility.”
The Times editorial board weighed in on the length of time it's taken for congressionally-approved dollars to get into peoples' bank accounts. "An antiquated financial system is slowing distribution of federal stimulus to families. Policymakers are making things worse."
Don’t go too far
The Bank for International Settlements says easing bank rules is needed to beat the economic consequences of the coronavirus, “but it must be temporary and limited to avoid undermining financial stability after the epidemic has passed,” Reuters reports. In a paper released Wednesday, the BIS, a global body for central banks, said “easing the rules too far could backfire by weakening the banking sector’s ability to fund the economy in future.”
Win one, lose one
A day after an investor proxy advisor told Credit Suisse shareholders they should vote against the bank’s executive pay proposals, another one is recommending that investors approve them. “The ISS recommendations, seen by Reuters, come as a boost for the Swiss bank after Glass Lewis advised shareholders to deny its leadership a discharge following a spying scandal that cost ex-boss Tidjane Thiam his job.”
“Whilst the company is currently subject to an ongoing FINMA probe, we note that no formal charges have been brought against the company, and it has not been confirmed that any individuals are subject to proceedings,” ISS said. “Furthermore, it appears that the responsible individuals were identified and subsequently dismissed.”
At the same time, a Swiss federal court ruled against the bank’s attempt to block an auditor appointed by FINMA, Switzerland’s financial supervisor, from investigating the spying scandal. Credit Suisse said the auditor lacked sufficient independence to conduct the probe.
“March was the most extraordinary month of my career. We had both a spike in client volumes and spike in volatility. That’s a very potent combination that had been missing for quite some time.” — Jim Esposito, co-head of Goldman Sachs’s trading arm, about the increase in trading business in the first quarter.