How Investment Banks Benefit From the Crisis
Morgan Stanley recently made the headlines with an announcement: the economic turmoil brought the US investment bank record figures in the second quarter. It is not the first time that banks could become beneficiaries of a crisis.
True to the motto that the suffering of some is the business model of others, Morgan Stanley and some competitors are currently benefiting from the trading boom on the financial markets. Investors have to restructure their portfolios due to dramatic price fluctuations, while companies are reporting high demand for funding. Morgan Stanley holds significant shares of Wall Street trading in its hands, which is partly the reason why the bank generated a record profit of 3.2 billion dollars in the second quarter, an increase by 45 percent compared to the second quarter of 2019.
The five largest Wall Street banks — JPMorgan Chase, Goldman Sachs, Bank of America, Citigroup, and Morgan Stanley — recorded a total trading turnover of 40.75 billion dollars in the second quarter. This is the highest figure in a decade. In Europe, a number of private banks present in the trading business are benefiting equally. For example, Julius Bär was able to report the highest half-year profit in its history in the first six months of the year at 491 million CHF.
Many analysts expect transaction volumes to decline in the second half of the year, making the current upturn in revenues unsustainable. Most financial stocks are not yet met with exuberant confidence on the equity markets. However, it is not unrealistic that some banks will end up being the beneficiary of the Covid-related economic crisis.
It would not be the first time in the history of Morgan Stanley. The investment bank emerged from the split of J. P. Morgan & Company in 1935, as the Glass-Steagall Act required the separation of commercial and investment banking. John Pierpont Morgan, the bank’s longtime sole ruler, made a name for himself as a shrewd crisis profiteer. Twice he used a recession to his advantage.
First, he and the Rothschild family sold 3.5 million ounces of gold to the US Treasury, whose reserves had shrunk to a minimum during the economic crisis of the 1890s. In return, Morgan and the Rothschilds received lucrative guarantees in the form of 30-year government bonds. The controversial deal with the private bankers put President Grover Cleveland under considerable pressure within his party. Democratic presidential candidate William Jennings Bryan took Morgan and other Wall Street bankers under fire during the 1896 election campaign, while Morgan helped Jennings’s opponent William McKinley win the election with millions in donation.
In the course of the 1907 financial crisis, Morgan again came into the picture. The American economy was down on its knees and many banks in New York were threatened with collapse before Morgan took the reins. He orchestrated the actions of a group of bank managers, who pumped millions into the market several times and bought up falling securities of relevant companies. Morgan alone took up New York City bonds for 30 million dollars in one day. He basically assumed the role of a central bank that did not exist at the time and, to the displeasure of President Theodore Roosevelt, made a lot of money in the long term with the securities acquired during the crisis.
Later on, a committee of the US House of Representatives found in an investigation that a small group of bankers around Morgan exercised considerable control over many industries and was in an almost untouchable position. This situation was not to change despite stricter regulations, which is why individual US banks often emerged as winners in further crises of the 20th century, especially when the public sector stepped in as guarantor.
Today, Morgan Stanley and Goldman Sachs dominate the credit business with large companies and wealthy investors. The high-risk loans to private households and small businesses, which increase the vulnerability of other banks in the current crisis, are not a burden on Morgan Stanley’s portfolio. Instead, the focus is on financing corporations that are highly likely to be supported by the government if necessary. “Morgan Stanley and Goldman Sachs are just more in the right place at the right time. They don’t have the traditional commercial bank revenues as much as others,” stated analyst Mike Mayo in a report in Vanity Fair.
At the moment, Morgan Stanley is building on its market advantage on Wall Street, while BNP Paribas is trying to follow suit on the other side of the pond. The French institute wants to establish itself as the market leader on the continent by expanding its business with large corporations during the crisis. Most recently, they gave out guaranteed loans to BP and Siemens.
When granting loans to Air France, BNP insisted on additional insurance from the French government. “If a company, an airline for example, was in good shape in February then the government guarantees are [there] just to get it through the Covid-19 period,” said BNP’s CFO Lars Machenil. BNP received corporate requests for loans totaling 17 billion euros in France alone, with the government providing guarantees for up to 90 percent of the money.
Speculation on the relative safety of the economy, guaranteed by political decision-makers who have to avert a wave of bankruptcies, has become a model for success in the crisis. The aid programmes and state guarantees that have been put in place lead to lower-risk lending business for investment banks, which at the same time become irreplaceable for the survival of economy. Frédéric Oudéa of Société Générale recently described it somewhat provocatively with the phrase: “We are the doctors of the economy.” Only in this case, doctors can choose which patients to support.
