Bonanza: Wall Street-Main Street Divide Laid Bare During US Economy’s Worst-Ever Quarter

Morgan Stanley joined Goldman Sachs in reporting what might be described in some corners as “indecent” results on Thursday.

Like Goldman, Morgan’s trading performance in fixed-income was outstanding. Sales and trading revenue totaled $3.03 billion in the second quarter, making a mockery of forecasts, which called for $1.81 billion. In equities, the bank generated $2.62 billion in revenue, also ahead of estimates. All told, sales and trading revenue jumped 68% YoY.

Morgan explained the results in a characteristically spartan release, citing “strong performance across products and geographies”. The bank saw “robust global capital markets activity and credit spread movements” in fixed income and enjoyed the benefits of “elevated volatility and wider bid-offer spreads” in FX and rates. Commodities, meanwhile, saw “higher client activity” thanks to volatile markets, while the equities business was strong “across all regions”.

Read more: Goldman Puts Up Mind-Boggling Trading Results, Beats On Pretty Much Everything

As regular readers know, I am not one to demonize banks, let alone bank employees who, in most cases, are just doing their jobs, even if the public might not approve of the profession they chose.

And yet, the reality is that during the worst quarter for the US economy in the history of modern economic statistics, Wall Street’s traders reaped a massive windfall.

Trading revenues beat estimates by a wide margin across the board, with results from Goldman and Morgan standing out as particularly “impressive”. (Your choice of adjective to describe these numbers will depend heavily on how you’re predisposed to viewing the disparity between Wall Street and Main Street more generally).

All told, the largest five US investment banks raked in $33 billion in trading revenue during the second quarter.

This should be set against commentary from bank executives who, in some cases, struck a decidedly downbeat tone about the state of the economy.

“I don’t think anybody should leave any bank earnings call this quarter simply feeling like the worst is absolutely behind us and it’s a rosy path ahead”, Citi’s Michael Corbat said Tuesday.

The disparity between Main Street and Wall Street is exemplified by the juxtaposition between a blockbuster quarter for Wall Street’s trading desks and the tens of billions JPMorgan, Wells Fargo, Citi, and Bank of America set aside for losses amid the deepest US recession in a century.

The disparity between the two visuals above is remarkable.

Additionally, it shouldn’t be lost on anyone that the mad dash by corporate management teams to raise capital in the second quarter translated into still more billions for Wall Street.

In fact, Goldman, Morgan, Citi, and JPMorgan together generated some $25 billion between them counting FICC revenue and debt underwriting fees.

You’re reminded that companies rushed to take advantage when the Fed’s promise to backstop corporate credit markets opened the door for new issuance.

Blue-chip US corporations issued more new debt in the first half of 2020 than in all of 2019. In June, junk borrowers broke a record for the most high yield debt issued in a single month.

“Because corporate bonds tend to trade most after they’re freshly issued, the explosion in debt sales fueled a trading boom as well”, Bloomberg notes, adding that “banks could also reverse some markdowns the firms had to take on corporate loans stuck on their books” as the rally in credit unfolded.

To be fair, corporations raising money in the second quarter were doing so out of necessity in most cases. “It’s pre-funding because this is not capital — a lot of this capital’s not being raised to go spend”, Jamie Dimon said, on JPMorgan’s call this week. “It’s being raised to sit [on] the balance sheet so that you’re prepared for whatever comes next”, he added.

In the same vein, you could argue that had this money not been raised in the market, it would have needed to come in the form of more taxpayer bailouts. Boeing is a case in point.

Still, the bottom line is that during a quarter when many on Main Street were unsure if they could even pay the rent and put food on the table, Wall Street’s traders and investment bankers pulled in nearly $40 billion.

The irony, as illustrated above, is that the very same banks (plus Wells Fargo) were forced to put aside almost the exact same amount for losses tied to precarity on Main Street. At least there’s some poetic justice in that.