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October 16, 2021

Goldman Sachs (GS.N) took the crown among Wall Street firms in the third quarter of the year. Then again, of course, it did. A surge in dealmaking played into the hands of the financial sector’s primo consigliere. But look at the bigger picture, and the investment banking windfall that characterized the last several months could be a liability, even if it was fairly won.

David Solomon’s traders made $5.6 billion in the third quarter, almost one-quarter higher than a year earlier. His advisors and capital markets bankers reaped fees 88% higher than the same quarter last year. That growth beat peers like Morgan Stanley (MS.N), Citigroup (C.N), and JPMorgan (JPM.N). They probably don’t mind much, though. Apart from Bank of America (BAC.N), all of the big five firms made more in the first nine months of 2021 than they did all of last year.

Scales of profits
The profit bonanza fueled by easy monetary policy and government intervention is well known by now, but the scale is notable. In 2019, the five biggest firms made around $27 billion of combined trading and investment banking revenue per quarter. In the seven quarters since the start of 2020, that increased to over $37 billion. That suggests over $70 billion more revenue, in total, than might have come in normal times.

Those gains have come fair and square. But they’re still problematic for the industry overall because banks aren’t doing as much of the thing they’re designed for: lending. True, they say they’d like to. The Federal Reserve’s latest survey of loan officers says banks are actually making it easier for companies and consumers to borrow.
Bumper profits raise the pressure to do more, especially as a regulatory changeover looms. President Joe Biden will soon nominate a new top cop at the Federal Reserve after Randal Quarles ceded the position on Wednesday. At the Office of the Comptroller of the Currency, Biden has nominated Saule Omarova, a law professor who has expressed skepticism over banks profiting too much when the economy is in trouble.

Goldman, as a newcomer to main-street lending, has less to prove than its bigger rivals. Likewise, Morgan Stanley is pushing further into “financial wellness,” something regulators ought to welcome. Still, the Covid-19 windfall is likely to lead to more questions about who the banking system is really geared up to benefit. 

A snippet of the performance
- Goldman Sachs on Oct. 15 reported third-quarter revenue of $13.6 billion, a 26% increase on the same period a year earlier, and higher than analyst estimates of $11.7 billion, according to Refinitiv.

- The Wall Street firm made $1.6 billion from advising companies on mergers and acquisitions, a quarterly record. Earlier in the week, Bank of America, Morgan Stanley, and JPMorgan also reported record quarterly revenue for their advisory businesses.

- Goldman reported $5.6 billion of trading revenue, 23% higher than a year earlier, with a 51% increase in equities trading, and flat fixed-income revenue.

- Credit card balances of $6 billion had roughly doubled in a year. Goldman launched a credit card with iPhone-maker Apple in August 2019.