Mix-Ups on Wall Street

By Chris Marasco - September 14, 2012 | Tickers: C, GS, JPM, NES.DL | 0 Comments

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Goldman Sachs (NYSE: GS) is only one company affected by the new financial regulations, but it is trying the make the best of it.  The Dodd-Frank Act and the Volcker Rule are seriously inhibiting banks freedom to find ways to profit.  As a result, banks have turned to wealthy clients to boost revenues – through lending and through giving complex advice.

According to Goldman CFO David Viniar, the:

Private wealth business is a good business for us. We have a bank, we are a bank, a bank holding company with a bank, we’re raising deposits, and we’ll use some of those deposits for private individual loans, some of it for corporate loans.

Goldman’s bank is pushing for higher revenues through higher assets and increased lending.  As of July, the bank had $100 billion in assets and $50 billion in loans – with the hope that the Wall Street firm can boost that loan number to $100 billion.

Also, JPMorgan (NYSE: JPM) has been continuing to ramp up its private bank, sometimes referred to as the best on Wall Street.  In 2011 JPMorgan’s private bank won a host of awards for its privacy, research, brand, and product selection from Euromoney, Institutional Investor, and Financial Times. 

Even though JPMorgan has been spinning off some of its proprietary trading operations, the bank has been able to produce profits from banking ultra-high-net-worth individuals – worth $25 million or more.  Often client-facing bankers will pore through insider stock sales, the sale of businesses, and large home sales to find potential customers for the private bank.

A Struggling Joint Venture

Citigroup (NYSE: C) and Morgan Stanley (NYSE: MS) are also trying to earn fat profits from advising and lending to the wealthy.  The two firms formed a joint venture, creating brokerage Morgan Stanley Smith Barney.  The 2009 merger aimed to create a brokerage empire, but the company has not been able to meet its financial targets.

Moreover, brokers within the unit are becoming disgruntled.  Approximately 200 high-grossing brokers are threatening to leave the firm, The Wall Street Journal reports.  The brokers are upset with slow changes to the company – ranging from upgrading the technology in the firm’s computer systems to faster fund transfer policies to even changing the music that plays when callers are put on hold.

Improvements are on the way, but the firm had better move quickly or the brokers may move to higher-end shops like Goldman, JPMorgan, or UBS, taking valued clients with them.

Also, Citi and Morgan Stanley have fought over the valuation of the joint venture.  Morgan Stanley hoped to exercise its option to boost its stake in the deal to 65%, then eventually to 100%.  Thus Citi wants a high price.

Citi currently values the deal, assuming a new capital structure, at $22.5 billion, while Morgan Stanley values the venture at $9.5 billion, assuming the same capital structure.  The companies should eventually strike a deal, though it may not be in the near future.  In any case, these banks are trying to find ways to profit amid new, complex regulations.

Overall, Wall Street is struggling and bustling to regain some of its lost profits.  The new government regulations have effectively limited the banks to trading just 3% of tier 1 capital – and only for hedging purposes.  If the banks ever hope to return to the fat profits and good times enjoyed before the recession, they will continue to find new business opportunities which they can scale quickly.

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