Four of the largest U.S. banks--Goldman Sachs, Citigroup, JP Morgan,
and Bank of America--have all accomplished something that would be
impressive in any year, but is especially so in today's economy. All four
report that they made money during every single one of the 61 days of
trading in the first quarter of 2010. To underscore the
significance of the event, this is Goldman Sachs' first perfect quarter
since its 1869 founding. How did this happen?
'Played Matchmaker' Well There might not be much of a secret
recipe, according the New York Times' Eric Dash. "Risk management experts
said the four banks, as well as other Wall Street players, reaped big
rewards without necessarily placing big bets that stocks or bonds would
go up or down. Instead, they mostly played matchmaker, profiting from
the difference between the prices at which clients were willing to buy
and sell. Banks said that customer order flows were particularly strong
during the period." Dash paints the episode as largely a fluke.
Interest Rate NPR's Jacob Goldstein cites the
"ultralow interest rates set by the Fed" to explain it. "The near-zero
short-term interest rate set by the Federal Reserve means that banks can
borrow money essentially for free. When you can borrow for free, you
can even lend money to the government and make a profit. Ten-year
Treasury bonds paid an average interest rate of 3.7 percent last
- Banks' 'Responsibilities to Clients' The Big
Money's Kelly Faircloth suggests,
"The impressive results are likely to stir up the debate over
proprietary trading and banks' responsibilities to their clients." She
adds, "The gains weren’t due to big bets. Instead, banks profited from
matching clients to stocks at the right price. This quarter, they say,
the flow of orders just happened to be especially steady."
Banks Have a Big Lead in Trading The New York Times' Eric Dash writes, "Their
showing, disclosed in quarterly financial filings, underscored the
outsize — and controversial — role that trading has assumed at major
financial institutions. It also drives home the widening lead that a
handful of big banks are enjoying over lesser rivals on post-bailout
- Proves Futility of 'Playing' the Stock Market
Reuters' Felix Salmon explains,
"Active investors, in aggregate, never outperform the stock market.
Firstly, volatility is good for traders, not investors: just check out
trading results at the money-center banks last quarter. Those
profits come from trading desks which are structurally flat(ish), rather
than from investors who are structurally long. The advantage that
investors have over traders is that they have time and patience, but if
stocks in general are going nowhere over the long term, then that
advantage dissipates, and playing the stock market becomes a zero-sum
game in which the big banks are winning and therefore everybody else is
Game Liberal blogger John
Cole is highly suspicious. "They didn’t play a perfect game. They
played a rigged game. Someone want to explain the role of high frequency
trading and the other tools at their disposal to the NY Times?"
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