How investment banks – and crazy bonuses – came back from the dead: Kohler

When JP Morgan and Goldman Sachs became bank holding companies last year, we were all heralding the end of investment banking.

Some celebrated, some mourned, but everyone seemed to agree it was over. After all, there weren’t any left worth speaking of. Merrill Lynch had disappeared into Bank of America, ABN Amro had been swallowed by Royal Bank of Scotland and choked it to death, and JP Morgan and Goldman had become ordinary commercial banks.

How wrong can you get? Investment banking is not only alive and flourishing, but we learned this morning that the bank holding company called Citigroup is bumping along the bottom, still losing money.

Consumers are still falling behind on their loans, while Wall Street investment banking is absolutely booming and bonuses are back to record levels.

Between them, Goldman and JP Morgan have allocated about $US38 billion for compensation and bonuses for the first nine of months of this year, including $US11.8 billion in the third quarter just ended, and by the end of the year bonuses are likely to break all records. The senior executives will get tens of millions each.

Much of the revenue comes from principal trading. Goldman made $US8.8 billion from principal transactions in the third quarter; JP Morgan made $US3.9 billion. In each case this was the largest source of profits.

Citigroup, meanwhile, is wallowing along trying to make money from actual customers and failing to do so. Another $US8 billion in credit losses were reported for the quarter this morning, on top of $US8.4 billion last quarter.

Citi has suffered $US42 billion worth of credit losses since the start of 2008 and received $US45 billion in bailout money from the US Government, which now owns a third of the bank.

And it is clearly not out of the woods. CEO Vikram Pandit said last night that there were signs of “stabilisation” in Citigroup’s credit card and mortgage portfolios, but it was too early to call an end to the consumer downturn.

Even Citi’s investment banking division is doing poorly. Its profit is down from $US1.9 billion to a paltry $US775 million in the third quarter and it made almost nothing from trading. The company said it had “seen diminished trading opportunities during the quarter, particularly in equity derivatives, credit and securitised products”.

Given what JP Morgan and Goldman were making from all that stuff, Citi obviously wasn’t looking. Perhaps the fact that it’s 33% Government owned is now crimping its animal spirits.

So that makes two things that have escaped the GFC virtually unscathed: Australia and investment banking. The difference, of course, is that we didn’t cause it.

This article first appeared on Business Spectator.