In “Bigger Banks, Riskier Banks: The Post-Bailout Continuation of a Pre-Bailout Trends,” co-authors Nomi Prins and James Lardner look at the recent record of the top four commercial banks—Bank of America, JPMorgan Chase, Citigroup, and Wells Fargo—as well as the two giants of investment banking, Goldman Sachs and Morgan Stanley.

 

Profits have rebounded at all six institutions, which were among the biggest recipients of federal bailout and subsidization money. But, as the Demos report notes, it is higher trading revenues through riskier investing and speculation, not ordinary banking activity such as lending, that account for the improvement in one case after another. JPMorgan Chase, for example, today announced 2009 net profits of $11.7 billion, more than twice the 2008 figure of $5.6 billion. At the same time, trading activity surged, accounting for 15.9 percent of the company’s total revenues, which is an even higher proportion than in 2006 or 2007. In 2008, Chase’s trading division racked up a loss of $7 billion.

 

The other big banks will announce their 2009 profits next week. Extrapolating from data for the first three quarters, the Demos report finds the same pattern of rebounding profits based on high levels of trading with borrowed money, including low-cost government-subsidized capital. Perhaps the biggest difference between now and the pre-bailout period is that “is that more of the capital for today’s high levels of trading and securities packaging comes from the taxpayers in the first place,” the authors write.

 

In view of the way these banks have chosen to use their capital, they add, “it should come as no surprise that despite low interest rates and surging bank profits, many deserving businesses cannot get credit, while foreclosures continue to increase as homeowners struggle to refinance unaffordable mortgages.”

 

The report links the bank’s increased reliance on trading to increased systemic risk. At JPMorgan Chase, a widely used risk metric, ‘value-at-risk’ or VaR, stood at a record high of $248 million (as a daily average) for 2009; that’s a 23 percent increase over 2008.

 

"Bigger Banks, Riskier Banks" looks at the question of bank size as well as risk. “Little more than a year after a disaster that was largely of their making,” the authors write, “the country’s biggest banks have grown even bigger, in no small part because of government subsidies and interventions.”

 

Reform proposals making their way through Congress would establish a process for the safe “resolution” or unwinding of large, failing institutions. “But the record cries out for a pro-active rather than a reactive approach,” the authors argue. “’Too Big to Fail’ should mean too big to exist… Just as crucially… the principle of Glass-Steagall should be reestablished: the financial world should once again be divided into commercial entities, which can count on government support, and investment and trading entities, which cannot.”

 

Demos will issue an updated version of this report after all the banks have announced their 2009 profits.

 

To view or download the report, visit www.demos.org. To arrange an interview with Nomi Prins or James Lardner, see contact information.