Wall Street profits in 2009 are on track to beat the record set three years ago, at the height of the credit bubble, with help of the Federal Reserve's near zero interest rates.
The securities industry in New York City has returned to profitability faster than expected in the wake of the global economic recession, but the impact of a reorganized Wall Street on the coffers of the City and State of New York remains uncertain, according to a report New York State Comptroller Thomas P. DiNapoli released this week.
"Wall Street remains the engine that drives New York’s economy," DiNapoli said."It's encouraging that the industry is recovering faster than forecast. However, no one can predict the impact of compensation reform, which could restrict cash bonuses. Because of that uncertainty, New York can’t rely on tax revenues from Wall Street to save the day.
"And the Wall Street multiplier impact, which created three jobs for every securities industry job created, has worked in reverse. Jobs lost on Wall Street have led to job losses in the rest of New York’s economy. New York is and will always be the financial capital of the world, but taxpayers need to be protected from Wall Street volatility."”
The report notes that the four largest investment firms in Manhattan - - Goldman Sachs, Merrill Lynch, Morgan Stanley and the investment banking unit of JPMorgan Chase - - earned $22.5 billion in the first nine months, in contrast to losses of more than $40.3 billion in 2008, primarily at Merrill.
Net revenue at the four firms, which excludes interest expenses, hit a high of $57.7 billion in the second quarter, DiNapoli said. While total revenue has been higher in previous quarters, the banks benefited from a sharp decline in interest payments, $5 billion in the second quarter from a high of $76.3 billion in the last quarter of 2007 - - due thanks to the Federal Reserve for its federal funds rate of close to zero.
The gambling side of investment banking has been the biggest cash cow.
The firms’ own securities trading accounts with the help of money borrowed at the near-zero interest rates, earned member firms on the New York Stock Exchange earned a record $35.7 billion for their broker-dealer operations in the first six months, $8.9 billion more that the previous high in 2000, the comptroller said.
The profits surge is contributing to a jump in bonuses, with six of the biggest American bank holding companies setting aside $112 billion for salaries and bonuses, including deferred payments, in the first nine months, DiNapoli said. The six - - Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo - - may pay out as much as the $162 billion paid 2007 - - the year before the financial crash.
Highlights of the DiNapoli report include:
- Broker-dealer operations of New York Stock Exchange member firms earned a record $35.7 billion in the first half of 2009 - -more than 1.5 times the previous annual peak set in 2000.
- The four largest investment firms based in New York City, which are more diversified than traditional broker-dealers, earned $22.5 billion in the first nine months of 2009 compared to a loss of $40.3 billion during the same period last year.
- Employment in the securities industry in New York City declined by 28,400 jobs since the industry employment peak in October 2007, and total job losses are not likely to exceed 35,000 jobs. (The industry added 3,600 jobs in September.)
- Wall Street employment accounts for 24 percent of all wages paid in New York City even though the securities industry accounts for less than 5 percent of all employment.
- The total bonus pool – including cash and deferred compensation - - could be higher than last year, but compensation reform will restrict the amount paid in cash this year.
