Let’s take a look at the mighty house of Goldman Sachs, whose Q2 results have been blamed for the decline in the Dow yesterday.
Of the 54.99-point sell-off, Goldman’s 2.6% drop accounted for 40.7475 points. Still, earnings topped those of Q2 2016 and H1 revenues, at US$15.9bn, rose 12%. That said the “vampire squid” wasn’t going to bear its breast and tell the market in details why revenues in FICC had been under such pressure.
Those of us with our feet firmly in the fixed income space won’t find it hard to appreciate that money has been hard to come by with credit spreads as tight as they are and with volatility at such low levels, one needed a microscope to find it. But that’s most probably not the key. The obfuscation in the earnings call was over the pitiful performance of the commodities desk. We were given a tiny glimpse when we were told that said unit had its worst quarter since the Goldies partnership went public in May 1999. I don’t have any more insight into the workings of the firm than the next man although I have noted in the past that the oil analysts seem to have been far from their best and I would not be at all surprised if we learnt that the money has been spunked in energy trading.
Losing energy
Goldman doesn’t generally wash its dirty laundry in public and by the time we find out whether it was the girls and boys of the hydrocarbons group who were responsible for the dip in revenues nobody will care anymore anyhow.
Quarterly earnings, at US$3.95 per share, knocked the cover of analysts’ EPS consensus forecasts of US$3.505 but once the Street has decided that it doesn’t like what it’s seeing, there’s not much one can do. The argument proffered in the Pink’un this morning is that most of the increased revenues came from the private equity side of the business, that that is not good because of the feast and famine nature of the sector and that investors don’t like that. All I can say is that if you don’t want volatile earnings don’t put your money in investment banks and stick it in utilities. Investment banking is a transactional business that will have better and worse quarters. It’s the long-term average that really counts and, love ‘em or hate ‘em, nobody does it better.
US banks have not had a bad quarter although there is little doubt that the expectations built into the share prices had been a tad on the silly side. Yes, we have come out of the worst financial crisis in 70 years and yes, the banks did get it all horribly wrong, but we must keep an eye on the main feature of the sector. The authorities have been throwing their weight around, have been regulating banking to within an inch of its life and behaved as though they were the only people in the world who knew how it should be done. In doing so, they have vested a huge amount of their credibility in the smooth performance of the banking system and they will, mark my words, do whatever it takes – where have I heard that one before? – to make sure that they are not caught with their knickers round their ankles in the event of another banking crisis.
Chasing shadows
The big problem is and remains shadow banking, which does exactly what the banks do, just outside of the regulatory framework. The Daily Telegraph reported yesterday on the release of what seems to be the PBoC’s equivalent of the BoE’s Financial Stability Report, not yet available in anything other than Chinese. It reveals that lending through the shadow banking system is double what had previously been thought and that it has a higher outstanding loan volume that the regulated banking system. The apprentice has now outgrown the master.
All this has nothing to do with failures of capitalism; it just proves that in all human activity where there is demand, there will be supply. Disruption occurs and risks increase when the authorities believe their own taurian faeces in terms of being able to steer the process through choppy waters at no cost to anyone. The reform of the financial system has not failed because the banks haven’t played ball but because the demand for credit hasn’t gone away; if the banks can’t lend, then somebody else will do.
Credit cheques
I recently raised the point of a friend of mine with a net worth of somewhere between £4m and £5m who tried to raise £100,000 secured against a property worth £1.5m but was turned down. At the same time payday loans at interest rates of well over 1,000% are being advertised on the TV all day long. Those interest rates reflect nothing more than the default rate of the payday loan cohort, which makes me wonder why one would lend in that space anyway while those with a copper-bottomed credit record can’t borrow. I myself was once turned down for a credit card – it was Morgan Stanley Discover – because I had no credit record.
Excessive intervention by the state has created a Frankenstein’s monster of a system of lending and borrowing and my guess is that heaven and earth will be moved to prove that they were right and we were wrong. I thus conclude that the banking system has a new, invisible implied government guarantee on it that is secured on the reputational risk of all the state pension-secured little Napoleons. One particular friend of mine, once the head of public policy for a global banking group, presented a paper on lending and money creation for which he was laughed off the stage. Four years on, having been dropped like a hot potato by the City grandees, he is seeing his thinking re-emerge, no doubt with somebody else taking all the credit.
Meanwhile, I continue to flirt with the blockchain space where 21st century banking is going. It is as yet not much further down the road than the auto industry was when cars were still obliged to have a man walk in front of them bearing a red flag. We have yet to see who the Thomas Edisons, the Henry Fords or the Bill Gates of that space will be but they are out there somewhere. Having spent most of my career on the sellside of the sellside, I learnt that one must not expect to get answers to the questions one has not asked. Start asking or risk being left with a mews full of redundant but very pretty horses and carriages.