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Just so we're clear on what this means -- on a net trading basis, they made money every single day in Q1. 90 for 90.
How are they doing this? It's called free money. They borrow from the Federal Reserve at 0%, and re-invest much of that back into Treasuries. Playing the spread.
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Bloomberg has the details:
Four of the largest U.S. banks, including Citigroup Inc., racked up perfect quarters in their trading businesses between January and March, underscoring how government support and less competition is fueling Wall Street’s revival.
Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc., the first, second and fifth-biggest U.S. banks by assets, all said in regulatory filings that they had zero days of trading losses in the first quarter. Citigroup Inc., the third-largest, doesn’t break out its daily trading revenue by quarter. It recorded a profit on each trading day, two people with knowledge of the results said.
“The trading profits of the Street is just another way of measuring the subsidy the Fed is giving to the banks,” said Christopher Whalen, managing director of Torrance, California- based Institutional Risk Analytics. “It’s a transfer from savers to banks.”
The trading results, which helped the banks report higher quarterly profit than analysts estimated even as unemployment stagnated at a 27-year high, came with a big assist from the Federal Reserve. The U.S. central bank helped lenders by holding short-term borrowing costs near zero, giving them a chance to profit by carrying even 10-year government notes that yielded an average of 3.70 percent last quarter.
Yield Curve
The gap between short-term interest rates, such as what banks may pay to borrow in interbank markets or on savings accounts, and longer-term rates, known as the yield curve, has been at record levels. The difference between yields on 2- and 10-year Treasuries yesterday touched 2.71 percentage points, near the all-time high of 2.94 percentage points set Feb. 18.
It’s an awkward moment for the largest banks to be reporting more profitable trading. President Barack Obama is seeking to prohibit banks from trading solely for their own profit, a proposal favored by Paul Volcker, the former Fed chairman who is now a White House adviser.
“The banks are getting while the getting is good because you have regulatory reform and the Volcker rule and possible bank taxes down the road,” said Matthew McCormick, a banking analyst at Bahl & Gaynor Inc. in Cincinnati, which manages about $2.8 billion including bank stocks. “It’s statistically improbable to have three firms batting 1,000 and also pitching a perfect game. You wonder why the rest of America has some suspicion about proprietary trading.”
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