By Pam Martens: March 24, 2019 ~
The Office of the Comptroller of the Currency (OCC), the Federal regulator of national banks, which includes the largest banks on Wall Street, quietly issued its quarterly report on trading in cash instruments and derivatives on Friday. The report contained a shocker: stock (equity) trading had plunged 88.6 percent in the fourth quarter of 2018 versus the fourth quarter of 2017 on a consolidated basis at the bank holding companies, which includes the results of their commercial and investment banks. Equally stunning, stock trading was down an even more staggering 91.7 percent from the third quarter of 2018. (See chart above from the report.)
This bombshell statistic is something that we have not heard a peep about from either the Wall Street banks on their earnings calls or the business media.
In fact, Wall Street banks have been telling business media that their trading pain in the fourth quarter came from fixed income (bond) trading. The media reports now read like something from Alice in Wonderland when compared to the OCC report.
Reuters reported on February 25, 2019 that while Wall Street banks overall did better than their European counterparts “The biggest losers, however, were the divisions that trade fixed income, currencies and commodities…However, equity trading picked up, particularly for Wall Street banks, where revenue rose 10 percent.” That statement contrasts with this statement in the OCC report: “The quarter-over-quarter decrease in trading revenue was across all instrument categories with the largest decrease due to equity trading.”
We’ve reached out to the OCC to explain the dramatic difference in what the banks are reporting versus its report and will also reach out to the Wall Street mega banks next week for their explanation. We’ll provide the details to our readers if we receive any meaningful clarification.
Not only did stock trading collapse in the fourth quarter according to the OCC, but according to another chart in the report (see Graph 9b) equity trading revenue plunged to multi-year lows, coming in at $441 million in the fourth quarter of 2018 at the bank holding companies. That compared to $3.86 billion in the fourth quarter of 2017; $3.0 billion in the fourth quarter of 2016; and $3.7 billion in the fourth quarter of 2015.
We can think of one possible reason that the Wall Street mega banks did not want to talk about the staggering results of their equity trading in the fourth quarter. If they are simply matching buyers with sellers (or vice versa) which Wall Street calls market-making, instead of engaging in risky trading for the house (proprietary trading), how could they have had such disastrous results in the quarter?
Table 7 in the OCC report shows that the Federally-insured commercial bank unit of JPMorgan Chase lost $644 million in the quarter trading equity positions while Goldman Sachs Bank USA lost $119 million. Scarier still, Citibank N.A., the Federally insured unit of Citigroup, lost $151 million trading credit derivatives while Goldman Sachs Bank USA, also Federally insured, lost $407 million trading credit derivatives. Credit derivatives played a major role in the 2008 financial crash and the need for an epic taxpayer bailout of Wall Street banks, and yet, here we are today, still writing about Federally insured banks, backstopped by the taxpayer, trading credit derivatives.