Why the big Wall Street banks are hurting

The 1% is worried, and not because of Occupy Wall Street. A lack of easy money to inflate a new bubble has brokers and big banks -- including B of A and Goldman Sachs -- losing money and doing layoffs.

By MSN Money Partner Nov 15, 2011 1:30PM

By David Weidner for MarketWatch

 

The 1% is worried.

 

It’s not the protesters drumming in Zuccotti Park or the chants of “shame” keeping them up at night at their Manhattan homes. It’s a business model built to churn out easy money in a bubble that’s sounding an alarm.MarketWatch

 

Wall Street is struggling with market forces that keep dragging its bubble machine back to the ground.

 

Oh, the banks have tried. On the retail front, Bank of America (BAC) said it would slap a $5 monthly fee on its debit card users. On the institutional front, MF Global ramped up leverage to buy risky European sovereign debt.

 

But B. of A. was beaten back by a consumer revolt and an industry rebellion. And MF Global chief executive Jon Corzine found out the hard way that leverage is still every bit as risky as it was in 2008.

 

Without easy money, Wall Street’s apparatus for mining easy cash have gone quiet. Goldman Sachs Group (GS) lost money trading 21 days during the most recent quarter, the most since 2008. The firm even owned up to $100 million in losses on a single day.

 

Much of this is due to the evaporation of the huge spreads in fixed income that traders generally take advantage of. Treasurys and corporate and municipal bond spreads have narrowed to a sliver. This has hurt the so-called shadow bankers as well. Witness the 5.5% decline for the Hedge Fund Research Index in the third quarter.

 

Not even gold (GLD) has been gold since September, it’s off 5%.

 

Bubble-deprived?

The industry-wide wipeout is a far cry from the boom-to-bust two decades we’ve just completed. We went from real estate boom to bust in the 1990s, technology boom to bust at the turn of the millennium, back to a real estate boom to bust in the last eight years.


Without an asset to inflate, Wall Street is bracing for a prolonged grind. The industry has shed more than 30,000 jobs. Bonuses are expected to decline 20% to 30% for those who still hold their jobs. Investors have seen bank stocks fall 27% since February, as measured by the KBW Philadelphia Bank Index, and brokerages tumble more than 30%, according to the Amex Securities Broker/Dealer Index.

 

Then, of course, there are the European banking ties to Wall Street. Banks including J.P. Morgan Chase & Co. (JPM) and Morgan Stanley (MS) have bent over backwards to show their holdings are relatively small.

 

But as many investors have figured out, direct holdings are one thing, indirect exposure through credit-default swaps and counterparty agreements are an equal, if not greater, threat. The market impact even if a bank or brokerage doesn’t have any ties remains dangerous.

 

Europe, in many ways, is the next -- and perhaps not the last -- bubble to pop. China’s exposure to its own growth and the hole it is digging itself into by buying U.S. debt and keeping its currency pegged to the dollar represents another.

 

If Wall Street could only find another bubble to inflate, those risks would mitigate. But the pump is broken.

 

Ultimately, Wall Street could survive if bankers and investors could accept moderate growth. If the Obama administration and Ben Bernanke at the Federal Reserve took an aggressive and clear stance on the housing market and interest rates, banks could map their future.

 

For now, it’s still bubble economics. And the only thing for certain is that the air is coming out, not going in.

 

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