New Demos Report Finds High-Risk Trading Profits Soared in '09 At Affected "Too Big to Fail" Firms

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New Demos Report Finds High-Risk Trading Profits Soared in '09 At Affected "Too Big to Fail" Firms

WASHINGTON - Last night, President Obama called for directing $30 billion in TARP
funds to community banks for small business lending, in recognition
that the largest banks have used taxpayer funds for increased trading
activity while lending remains low. He also reiterated his
determination to limit the size and risk-taking of big banks. In
response, the public policy center Demos issued the following statement
from Washington DC office Director Heather McGhee, as
well as new data examining 2009 earnings reported by the biggest banks
and how that revenue is connected to trading activity:

"Ten years ago, the financial lobby convinced our leaders that the
country's most important banks should be allowed to operate like hedge
funds. That deregulatory gamble cost us trillions in household wealth
and millions of jobs. President Obama's proposals greatly improve the
reform package needed to prevent another crisis.

"A proprietary trading ban is an important start, since all trading
by commercial banks poses unnecessary risks to our financial system. A
new report we published this week analyzes the extent of recent trading
profits--which the Administration's proposal would limit--at the
largest financial firms. Our report shows how, post-meltdown, the
largest banks' profits are recovering because of trading, not
traditional activities such as lending, and calls for even greater
reforms to reduce systemic risk in the industry."

In Bigger Banks, Riskier Banks: The Post-Bailout Continuation of a Pre-Bailout Trend co-authors Nomi Prins and James Lardner
look at the recent activities of the top four commercial banks--Bank of
America, JPMorgan Chase, Citigroup, and Wells Fargo--as well as the two
investment banks that stand to lose their access to the Federal Reserve
discount window under Obama's proposal, Goldman Sachs and Morgan
Stanley.

All of these institutions (among the biggest recipients of federal
bailout and subsidization money) did better in 2009 than they had in
2008. But, as the Demos report notes, it is higher trading revenues
through riskier investing and speculation, not ordinary banking
activity such as lending, that account for the improvement in one case
after another.

At the end of last week, JPMorgan Chase announced 2009 net profits
of $11.7 billion, more than twice the 2008 figure of $5.6 billion. At
the same time, trading activity surged, accounting for 15.9 percent of
the company's total revenues, which is an even higher proportion than
in 2006 or 2007. In 2008, Chase's trading division racked up a loss of
$7 billion.

Citigroup's results, posted Monday, were more troubling: a
fourth-quarter net loss of $7.6 billion, due mostly to increased losses
in Citi's loan portfolios (net credit losses were $7.13 billion) and
more than $6 billion in TARP payback-related expenses. At the same
time, Citi's trading and investment-banking revenue jumped 5.9% to $5.4
billion from a year ago, demonstrating a heavy reliance on the
company's riskier operations.

Looking at the banks, the Demos report finds the same pattern of
apparent recovery based on high levels of trading with borrowed money,
including low-cost government-subsidized capital. Perhaps the biggest
difference between now and the pre-bailout period is that "is that more
of the capital for today's high levels of trading and securities
packaging comes from the taxpayers in the first place," the authors
write.

In view of the way these banks have chosen to use their capital,
they add, "it should come as no surprise that despite low interest
rates and surging bank profits, many deserving businesses cannot get
credit, while foreclosures continue to increase as homeowners struggle
to refinance unaffordable mortgages."

The report links the bank's increased reliance on trading to
increased systemic risk. At JPMorgan Chase, a widely used risk metric,
‘value-at-risk' or VaR, stood at a record high of $248 million (as a
daily average) for 2009; that's a 23 percent increase over 2008.

Bigger Banks, Riskier Banks
looks at the question of bank size as well as risk. "Little more than a
year after a disaster that was largely of their making," the authors
write, "the country's biggest banks have grown even bigger, in no small
part because of government subsidies and interventions."

While the President's new proposals are an improvement on earlier
proposals, Demos will work in Washington to advance an even stronger
reform package. The authors note: "'Too Big to Fail' should mean too
big to exist... Just as crucially... the principle of Glass-Steagall
should be reestablished: the financial world should once again be
divided into commercial entities, which can count on government
support, and investment and trading entities, which cannot."

 

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A multi-issue national organization, Demos combines research, policy development, and advocacy to influence public debates and catalyze change. We publish books, reports, and briefing papers that illuminate critical problems and advance innovative solutions; work at both the national and state level with advocates and policymakers to promote reforms; help to build the capacity and skills of key progressive constituencies; project our values into the media by promoting Demos Fellows and staff in print, broadcast, and Internet venues; and host public events that showcase new ideas and leading progressive voices.

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