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What Fall Brings for Wall Street’s Banks

The nation’s biggest banks enjoyed a brief respite from torment this August as Congress adjourned. The fall, however, will be a major test: The gifts that banks received in the first half of the year, including a boom in fixed-income trading and several asset sales that boosted profits, will likely slow in the second half of the year. In addition, Congress is examining legislation on everything from regulating commodities and derivatives trading to reining in bonuses. Let’s take a look at where the major banks stand, shall we?

Morgan Stanley
Total assets: $676.9 billion
Strengths: The firm shored up its wealth management business with its Morgan Stanley Smith Barney venture and profited handsomely from a spring boom in raising money for other banks.
Weaknesses: An aversion to risk, born from a desire to please regulators and shareholders, led MS to three straight quarters of losses while rivals made record profits. Now they’re reversing tack, hiring former Credit Suisse star Jack DiMaio to boost many fixed-income businesses and growing its trading in emerging markets. Chief executive John Mack’s salary has been $1 for the past two years, which can’t help morale.
Strategy: To increase appetite for risk and keep pace with rivals without losing money.
Where they’ll be by the end of the year: In the best case, Morgan Stanley’s SmithBarney joint venture and renewed focus on debt markets will shrink its gap with Goldman Sachs, which used to be its chief rival but has pulled ahead into bigger leagues. In the worst case, Morgan Stanley will fall further behind as it reorients its approach to taking risk.

Goldman Sachs
Total assets: $889.5 billion
Strengths: Stability. Rivals have trouble luring Goldman employees. Paid back its federal bailout funds, which lightens the yoke of government meddling. Fall should also bring a boom in investment-banking revenues. Goldman’s backlog of pending mergers and acquisitions is up 20%, and pending IPOs are up 30%. The industry average? Up only 6% and 13%, respectively, according to Pali Capital.
Weaknesses: Trading is Goldman’s bread and butter. The firm scored record profits from risky debt trading by exploiting big differences in bond prices when markets were chaotic. But the panic has abated and analysts expect a industrywide second-half slowdown in trading profits. Goldman, Wall Street’s whipping boy all summer, must also be apprehensive as lawmakers consider greater regulation of trading in commodities and complex derivatives, two of the firm’s more successful businesses.
Strategy: Goldman insists it won’t change how it makes money. It plans to shore up its asset management business, which slumped in size this year as wealthy investors pulled back on investing.
Where they’ll be by the end of the year: Best case scenario, Goldman Sachs will prove itself to be more than a debt-trading machine. In the worst case — which few analysts expect — a stew of unfavorable financial legislation, bad press, and a slowdown in fixed-income could hurt Goldman’s bottom line.

Credit Suisse
Total assets: $1.09 trillion
Strength: Only big investment bank that didn’t get a bailout. Because of Swiss ownership, no exposure to Congressional criticism. The firm is well-capitalized and has shaved billions of dollars in exposure to toxic commercial mortgage-backed securities and leveraged loans. Unique plan to pay its own bankers with mortgage-backed securities is, so far, more successful than expected.
Weakness: Reduction in market risk may please shareholders, but the firm’s tight lending standards make it harder to win advisory business from corporations. Pulling back from trading some mortgage-backed securities and junk bonds just as prices are seeing a record boom in those markets.
Strategy: Exiting or shrinking several of its riskier businesses, including highly structured derivatives, commercial mortgage trading and junk-bond trading as well as trading for its own account.
Where they’ll be by the end of the year: In the best case, Credit Suisse could be rewarded by shareholders and clients for avoiding risk. In the worst case, the firm could miss out on profits from rising mortgage and junk-bond prices.

Bank of America
Total assets: $1.8 trillion
Strengths: Size and scope. Its acquisitions of Merrill Lynch and Countrywide are, against the odds, boosting profits.
Weaknesses: Keeping the peace. Culture clashes continue between the legacy Bank of America and Merrill Lynch staff. The firm’s powerful brokerage force often calls the shots and has management perpetually over a barrel. Resentment abounds about stars with big bonuses or retention packages. Investment-banking bonuses were eye-popping last year and may be so again this year, to the government’s chagrin. Chief executive Ken Lewis is hobbled in his decision making by a radically reconstituted board of directors and powerful regulators. The firm is highly dependent on a consumer economic recovery because of its exposure to credit cards and mortgages.
Strategy: The firm has been hiring up a storm, raiding its rivals for talented traders
Where they’ll be by the end of the year: In the best case, newly named executives will organize Bank of America”s sprawl and improve morale. In the worst case, internecine battles and rivalries will continue to drag the firm’s progress back.

Total assets: $1.9 trillion
Strengths: Like Bank of America, Citigroup, as a TARP baby, has the government backing to stabilize its business. The government has pushed some hard-nosed banking veterans into the executive suite to provide guidance on retail banking, where Citi lost a lot of ground due to lack of leadership in recent years.
Weaknesses: Years of organizational restructurings have taken their toll on profits and morale. Citi faces a challenge in keeping talent if regulators crack down on compensation. It will be audited this fall to find out if its federal bailout was worth it to taxpayers. The firm has to hope the answer is yes.
Strategy: Return to origins in consumer banking and boost the investment bank without taking too much risk. Citigroup also has to avoid the ire of regulators, who are engineering many of the recent changes in the executive suite.
Where they’ll be by the end of the year: In the best case, a stronger Citibank will boost profits. In the worst case, regulators get more deeply involved in deciding which executives are in or out.

J.P. Morgan
Total assets: $2.1 trillion
Strengths: Acquisition of Bear Stearns helped set an industry record for investment-banking fees in the second quarter. J.P. Morgan’s book of mortgages may be more valuable as prices of mortgage-backed securities keep rising. Strong in trading, especially commodities and credit-derivatives.
Weaknesses: Depends heavily on fixed-income markets, which are likely to be slower in the second half. Money-losing credit-card business, as well as its mortgage business, have seen high defaults and are highly dependent on broader economic recovery. Stable of talent exposes firm to endless poaching attempts, although J.P. Morgan often files suit to stop star employees from accepting other job offers.
Strategy: Keep profits in trading and investment-banking strong in order to balance out the weakness in its consumer businesses. It, like its rivals, has an expanded appetite for trading risk.
Where they’ll be by the end of the year: In the best case, J.P. Morgan will keep revenues stable enough to be able to pay its traders and bankers well. In the worst case, J.P. Morgan’s exposure to American consumers and corporate loan losses will take a larger toll.

Barclays Capital
Total assets: $2.6 trillion
Strengths: Acquisition of Lehman Brothers’ investment bank helped double its second-quarter profits. The firm is aggressively hiring stars, having offered a $50 million pay package to a J.P. Morgan trader. Few Lehman bankers left after the acquisition.
Weaknesses: Barclays still has a lot of exposure to corporate loan losses and complex credit derivatives, which may further hurt revenues. Its dependence on debt markets may hurt the firm as those profits slow in the second half. It has received help from the U.K. Government.
Strategy: Reduce leverage and keep a stronger capital cushion. It sold off its asset management arm, Barclays Global Investors, to winnow its business mix.
Where they’ll be at the end of the year: Best case: Using massive balance sheet to win more corporate business. Worst case: Markets in second half may not boost profits, while increasing loan losses.

What Fall Brings for Wall Street’s Banks