What do you do when you help cause an equity bubble (and crash) and a real estate bubble (and crash) within a decade? Well, if you’re a bank you look for the next great market to profit from and (of course) crash. A recent WSJ article will make you sick to your stomach. They describe how Wall Street’s biggest banks are basically losing money in everything except their commodities businesses:
“Wall Street is tapping a real gusher in 2011, as heightened volatility and higher prices of oil and other raw materials boost banks’ profits.
A group of 10 large banks—including Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Citigroup Inc., Bank of America Corp. and Barclays PLC—saw their commodities revenues increase by 55% in the first quarter, according to Coalition, a firm that analyzes the performance of investment banks. After a disappointing 2010, commodities was the fastest-growing segment in banks’ fixed-income businesses in the first three months of this year, even though it still accounts for just 7% of banks’ total fixed-income revenues, Coalition said.
Commodities trading is a bright spot for institutions that face new regulatory clampdowns on practices that previously fattened bank profit margins, such as trading with their own capital and slapping customers with hefty “overdraft” fees. Oil is up about 10% so far this year, settling at $100.29 a barrel Wednesday, and commodities such as gold and copper are close to all-time highs.”
These businesses, which were once the oil in the engine of American capitalism have become nothing more than gigantic casinos and are helping to cannibalize the US economy. The 3-6-3 model (borrow at 3%, lend at 6% and hit the golf course by 3PM) has been replaced by the 2-20-0 model (rape the client at 2%, then rape them again at 20% and experience 0% of the downside). It’s not even remotely surprising that this financialization of the commodities markets has resulted in this:
And when it all comes crashing down Wall Street will lobby Congress to bail them out again, no one will go to jail and the big banks will change the casino game to another market. Until then, pay your executives as much as you possibly can and extract as much wealth from the middle class as humanly possible. Lord knows this revenue source won’t last forever….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.