Reply #25: Streets ahead of the rest

[54anickel]

http://www.economist.com/finance/displaystory.cfm?story_id=8458255

Humility? Forget it


IT HAS been a year to make even Croesus blush for the big Wall Street securities firms. Goldman Sachs, Bear Stearns and Lehman Brothers have all announced record profits and beaten analysts' expectations in the process. Morgan Stanley, which was due to report on December 19th, has also had an enviable year. Bloomberg, a financial-information firm, calculates that the industry will make $29.1 billion after tax in fiscal 2006, a 43% rise on last year, which was itself a bumper one. New York's tabloids have had a field day, splashing headlines like “Sachs of Loot” and fantasising about all the things outsized bonuses could buy.

Goldman, the best performer, is setting aside an unprecedented $16.5 billion to reward its talent, equal to $620,000 per employee across the firm. But it is now so profitable that the ratio of pay to revenue has actually fallen, to 43.7%, well below the 50% seen as a ceiling in the industry.

This is all good news for purveyors of luxury goods and fancy homes, who hope to pick up more than a few crumbs from Wall Street's table. Orders for bespoke suits are up on last year, says Jack Mitchell, who kits out some of the financial bigwigs. New York officials are delighted, too. They have slashed the city's budget-deficit forecast, in part because of the sharp rise in tax receipts from investment banks.

The banks can thank near-perfect markets for their good fortune. Mergers and private equity are booming, as are stockmarkets (the Dow hit another high last week). Volatility is low, credit still plentiful. Hedge funds and others are trading derivatives at a furious pace, providing a further lift to the banks' prime-brokerage businesses. In these conditions, the banks have (so far) profited handsomely from ratcheting up their own risk-taking. Across the industry, value-at-risk—a measure of potential losses on a bad trading day—has risen steadily. Some 70% of Goldman's net revenues now come from trading and investing on its own account.

Everyone knows this cannot last forever. The banks are hoping that their scope will help them when markets turn. Growth prospects look good in Asia and Europe, and all of the leading firms apart from Bear Stearns now do a big chunk of their business outside America. They are also beefing up their distressed-debt and bankruptcy teams, a source of profit that should mitigate any pain from a rise in defaults and tougher debt markets.

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