Goldman Sachs, JPMorgan Chase: How Did They Make So Much Money?

This might be called the "$3 Billion Dollar Question". Bank of America (NYSE:BAC) lost more than $2.2 billion in the third quarter of this year and Citigroup (NYSE:C) lost a staggering $3.2 billion in the same quarter.

But as the chart below shows us all, JP MorganChase (NYSE:JPM) and Goldman Sachs (NYSE:GS) appears to have flourished while their cousins languished.

Just as intriguing to me is the question that the next chart shows us concerning the ability of JPM and GS to create some impressive profits, pay their top people and their employees so lavishly while their peers continue to lose record amounts of money.

Then on Sunday Oct.18th the White House encourages all of us who are die-hard stock investors to realize that half the stimulus money hasn't even been spent yet.

In appearances on the Sunday news programs, White House advisers criticized those Wall Street firms that are paying huge amounts in compensation and benefits after accepting taxpayer assistance.

Goldman Sachs, for example, has said it has set aside $16.7 billion for compensation so far this year, more than $500,000 per employee. Citigroup is paying $5.3 billion in bonuses to its employees and Bank of America $3.3 billion.

The answers to why the Big Banks are able to be so generous in their "compensation" and why GS and JPM can claim to have made so much money in the 3rd quarter might help us to understand why the current stock market rally has lasted so long.

On the other hand, there are rumors floating on Wall Street that Mega-Company GE (NYSE:GE) is heading for financial insolvency or is there already. Is that going to set the stage for the next meaningful stock correction straight ahead?

On the other hand, in spite of the DJIA breaking the 10,000 level, we see investors selling into market strength and not acting "irrationally exuberant". Does this mean there is more money on the sidelines to drive market indices higher before the next correction? That wouldn't surprise me at all.

Since today, Oct. 19th, is the anniversary of the worst one-day drop in the stock market indices in history (in 1987), these are all relevant and timely questions.

DISCLOSURE: I'm currently long Citigroup.

Comments

[Matt Lechner:]

WSSIG
THE WALL STREET SPECIAL INTEREST GROUP

October 18, 2009

Senate Finance Committee
c/o Senator John Cornyn, Texas
517 Hart Senate Office Building
Washington, D.C. 20510

Re: Public Comment regarding proposed legislation on derivatives

Members of the Finance Committee:

We would like to voice the support of WSSIG for new legislative initiatives regarding derivatives. The derivatives market, together with the mortgage securities market, and their prevailing practices – are largely to blame for the recent financial crisis. Many of the bad actor firms have been shut down, some of the obvious ones, some not so obvious. Derivatives must be better regulated at this time. The mortgage securities market, while troubled, is more straightforward than the derivatives market; excepting certain bizarre and defective securities such as CDO’s. The derivatives market has been plagued for years by deliberate and entrenched fraud, and the time has come to face the reality of it, before it comes back for a Round II of the crisis, which is not outside the realm of possibility, although we hope not. Altough maybe we should say a prospective Round III; Round I being the Orange County California meltdown which was not altogether different, a lesson never learned perhaps. The problem is that the derivatives industry has gone to great lengths to have its products falsely classified as “not securities” and that charade must come to an end. They are securities – by any accepted definition of the term, and they must be subjected to the SEC umbrella, and sooner rather than later.

In the new round of legislation being negotiated – clear and unequivocal provision must be set forth defining derivatives as securities, thereby establishing unambiguous SEC jurisdiction over the industry, as it relates to American interests. Why is this seemingly academic point so important ? Because America’s financial control apparatus has largely grown up around securities, mainly around stocks, bonds, and mutual funds – and it is a good strong apparatus. By ducking, fraudulently ducking, the definition of what derivatives really are (securities), the derivatives industry bypasses the entire body of American law and regulatory practices with regard to financial products, and that is not good. When I was an Investment Broker at A.G. Edwards, Ben Edwards used to have a monthly meeting with the whole firm, on the squawk box. Around the time when derivatives were starting in earnest, one of the brokers asked Mr. Edwards “Will A.G. Edwards be getting involved with derivatives ?” Mr. Edward’s answer was “No, I don’t understand them; and I’m not sure anyone else does either.” In hindsight, and going forward, something to keep in mind. Think of the accounting problems alone.

Are derivatives to be forever a murky swamp, valued by whim ? Valued artificially high when so desired, other times valued artificially low; perhaps to suit an illicit accounting goal, perhaps to facilitate false accounting practices relating to “earnings management” and balance sheet chicanery. The purpose of this comment letter is not to condemn the derivatives industry. Some very good people are involved with it, and also some very bad people. Not to sound simplistic, but there is no question that derivatives exist. The question is do they get to run roughshod over America’s and the world’s financial sector by ducking America’s financial laws by way of a phony definition that, for the purpose of evading regulation, says they are “not securities”. The matter must be clarified; i.e. a legislative determination must be issued to the effect that derivatives will be deemed securities going forward, and therefore subject to the jurisdiction of the SEC, and to the established financial laws of this nation. Also, you should provide an email address plus a contact box, and a fax number, on the Senate Finance Committee website.

Sincerely,

Matt Lechner – CFP, CRPS, FRM
Chairman – WSSIG, the Wall Street Special Interest Group

Matt@FinancialRiskCons...

Oct 19 06:56 AM

[phdinsuntan...:]

they gor free USD greenbacks credit, shorted it against any non USD commodities and CDS and pocketed the difference, easy

Oct 19 08:52 AM

[SwingTimer:]

Marc,
I follow your blogs because you generally have relevant comments. But this time, you pose a question but don't give an answer (or even an opinion). Then you bring up a rumor, (adding to the rumor itself, which I haven't heard before), that GE may be bankrupt! Please... I just wonder why you bother to post an article which seems pointless.

Oct 19 03:52 PM

[ryanclarke:]

Don't forget the CEO of Goldman and the CEO of JP Morgan are both Democrats.

Oct 19 04:32 PM

[JWolf:]

What a disappointing article--a question is posed with no answer, or even a meaningful discussion of the answers.

Even one of the charts is a waste--the two are almost identical.

Disappointing.

Oct 20 12:43 AM