[miningmx.com] — DIWALI, the festival of lights, is a wonderful colourful time of the year in India where I have just been. Little clay pots full of oil and wick called diyas are being prepared. They will be lit at homes across the country at the weekend.
Parties are being held where generous gifts will be exchanged. Diwali is a joyous time – the season of return and renewal; the celebration of harvest; the festival of accounting when prayers are offered to Lakshmi, the goddess of wealth. Already, prayers seem to have been answered rather early, at least for the world’s banks.
Earnings from two of the major US banks have sparkled like a Diwali firework! JP Morgan Chase and Goldman Sachs both made more than $3bn in the quarter. Goldman’s results were lower than the last quarter, but still double against the same time last year.
The money was made from the bank’s trading and investments. In other words, Goldman Sachs took its own capital and turned itself into a money machine. Equities, derivatives, mortgage-backed securities; you name it, they traded and made money at it.
Out of the dogbox
Even the dog of the banking sector, Citigroup, seems to have shed a few fleas for the quarter and eked out a small profit of $101m (barely the rounding error on the other banks’ results, but a profit nonetheless). At the time of writing only Bank of America has actually reported a loss, mainly through its retail banking divisions.
Unfortunately unlike Rama, the king of Ayodhya who returned after 14 years in exile, the banks have returned to profitability in just about, oh, nine months. And unlike the harvest season celebrations of Lakshmi, they haven’t done it on their own – they have been given taxpayer money to do it. And that is the mixed blessing of the banks’ profits.
The fact that banks are making excellent money again is both good and evil for the financial system. We certainly need a strong banking system if the global economy is to get on its feet, no question about it. Strong banks make more loans which get the whole thing moving again.
But with those profits comes the inevitable bonuses that will be paid. Goldman said 43% of the banks’ costs – $16.7bn – would go to compensation. At this rate the compensation pool will be a record $20bn by year’s end.
Hard-hitting second wave
The grumblings from the critics have already begun. The argument is simple: if the taxpayer hadn’t bailed out Wall Street, far from getting bonuses bankers would have been thrown out of work, like office and factory workers laid off during 2009! The banks should be grateful, not greedy.
This argument is also circular. The banks shriek back: “You bailed us out because you need us.” If the banks went bust, more people would be out of a job.
There is truth to both arguments, which is why it is to be hoped common sense prevails. Bank of America’s retiring CEO Ken Lewis has agreed with the recommendation of President Obama’s pay tsar that he should work for free in 2009. And it is rumoured Goldman Sachs is to make a $1bn donation to charity at the end of the year. All of which is good. But is it enough?
In the months ahead, the second wave of this crisis will hit with cuts in spending, rising taxes and a worry that things are not getting better. When large bonuses are handed out, that worry will turn to anger. That anger will boil over.
Diwali is a time for celebrating renewal and return. If all the signs are right, economic growth has, by and large, returned. That alone is reason enough for fireworks and crackers. Let’s hope the banks have learnt something of a lesson, or I promise you the bangs from the crackers will be nothing to the explosions from the critics as banks’ bonuses blow up again.
