In the X-Men comics, there’s a villain called Magneto who can manipulate the magnetic fields around him—stopping bullets, turning all manner of weapons against those who try to attack him. Call him the new patron saint of Wall Street. In the wake of the financial crisis, we were told that Wall Street would change. Well, it has: It’s become superprofitable.
That was underscored last week, when the big investment banks released their results for the first quarter, and four out of five announced that their trading operations had made money each and every business day. The Times, the Journal, and the Post all resorted to the same baseball analogy, comparing the prowess of the bank traders to pitchers throwing a perfect game. No hits, no walks; a shutout.
The bank bailout, it seems, has succeeded better than anyone wanted. Policymakers wanted sober, responsible Bruce Banner. Instead we got the Hulk banks, led by JPMorgan Chase and Goldman Sachs. In the first three months of the year, Goldman had a pretax profit of $5.16 billion. Last year was the best ever for Goldman; this year’s on track to be even better.
Having, with the government’s help, survived the crisis, the big banks now must worry about how to survive their own success. Folks at Goldman themselves drew attention to the perfect quarter of trading profits, helpfully pointing out that it was the first in the bank’s history. Perfection, Goldman argued, comes from discipline, not reckless speculation.
That might be true (hedge-fund-style speculative gains are indeed less consistent than those from “market making,” or matching up buyers and sellers). It’s also incomplete; it helps that the crisis cleared the field of competition. But mostly, it’s beside the point. Whatever the cause, the banks’ uncanny quarter provides ammunition to those who would shrink Wall Street and attempt to strip it of its superhuman moneymaking powers.
For those who think all of investment banking is a racket—a view that’s migrated from street-corner folding tables to the hearing chambers of the U.S. Senate—the perfect quarter could easily become Exhibit A. You don’t have to go that far, however, to question its implications. For policy wonks, it heightens the sense that banks will simply dazzle and muscle aside regulators, paving the way for yet another “unpredictable” crash. “Can you imagine a regulator saying, ‘Let’s pull back’?” asks Zephyr Teachout, a professor at Fordham School of Law and visiting scholar at Harvard’s Kennedy School. “If a regulator starts making noise, the bank will just call up and say, ‘What are you talking about? We’re doing so well.’ ”
One Catch-22 of Wall Street has always been that when it does badly, it is thought to be full of fools, and when it does well, full of villains. Now we can add another: The more success the banks have, the greater the feeling that it is the prelude to disaster. Instead of accolades for an admirable display of prudence, 61 straight business days of trading profits elicit a jittery incomprehension. Suspicion even. One wonders if, in fact, this is real at all—an anxiety magnified by Wall Street’s own confusion over the causes of that sudden drop a couple of weeks back.
With good reason. If people at Goldman Sachs had looked a bit more closely at their competitors’ history, they might have been warier of highlighting this kind of result. Other investment banks have posted perfect trading records before. One, in fact, had two perfect quarters as recently as 2006. That was Lehman Brothers.