Why some banks are profiting in the recession

July 20, 2009 – 9:42 am – No Comment

Some of the country’s largest banks are posting unexpected and large profits. Why is it when the consumers of the nation are hurting that some banks are doing so well? After all, on Thursday JPMorgan announced a $2.7 billion second quarter profit, Goldman Sachs — $3.4 billion. These banks were both bailed out.

A large part of the jump in profits is due to an increase in underwriting. Companies that are looking to raise some money or refinance debt looked at the stock market rally in the second quarter as an opportunity and decided to look to investment banks for their business.

Separately, many financial companies were forced to raise additional capital during the second quarter. Banks and other lenders that accepted federal money under the Temporary Asset Relief Program (TARP) moved to return those funds to avoid additional oversight, but the government required that most of those firms raise additional capital before giving the money back. Those capital campaigns led to an increase in underwriting requests, particularly at Goldman and JPMorgan, Sprinzen says.

Companies go to investment banks asking for cash. The banks talk to clients such as pension funds or insurance companies to see if there is any interest among the companies in investing. If the fund or insurance company shows interest in the client, the company that needs the money gets a check and the bank gets the underwriting fee. This is what underwriting is and how the banks are profiting from it.

Right now, underwriting fees that banks are collecting are more than what they earned when the tech bubble was happening. This may be due to the fact there are a lot of companies that need to raise money and there has only been one real opportunity — when there was a short rally in the market. Not only did most companies get the cash that they had been wanting, but also got enough to last them through the rest of the year.

Banks are also making a lot from high trading revenues. The stock market has been on a crazy ride for the past few months. While people were trying to hop on the rally train in March — they were buying and selling very frequently during this time — banks were cashing in on the fees associated with trading. For JPMorgan Chase alone, trading principal transactions brought in $3.1 billion in revenue.

Goldman Sachs and JPMorgan don’t trade on exchanges; most of their trades are over the counter, which means if you want to enter into a trade or a swap, you call the bank to arrange it and they make a commission on the deal.

So, the banks are not exactly profiting from the recession, but from the small rallies that happen throughout.

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