…Said Wall Street to the Central Bankers

Both the Federal Reserve and the European Central Bank decided this week to hold off on any big new initiatives to stimulate markets and the sluggish economies of the United States and Europe. The lack of action may have a direct and painful impact on the chief source of revenue at investment banks on both sides of the Atlantic. Since the 2008 financial crisis, banks’ bond trading profits have soared when the Fed and the European Central Bank have announced, and then executed, radical moves to revive economic conditions. As that stimulus wanes, that trading income drops off.

The link between Fed stimulus and Wall Street earnings became apparent soon after the financial crisis of 2008. Faced with jittery markets and an economy that was not responding well to meeker modes of stimulus, the Fed bought $1.25 trillion of mortgage-backed bonds, mostly in 2009. In that year, Wall Street bond trading operations, which provide the bulk of profits at such firms, produced some of their strongest results ever. The five biggest trading banks in America together reported $78 billion of bond trading revenue in 2009, the year of “quantitative easing,” the term used for the Fed’s bond buying spree. Goldman Sachs’ fixed-income division reported revenue of $21.9 billion in 2009, up from $9.3 billion in 2008. But in 2010, as the Fed magic wore off, Goldman Sachs’ fixed income revenue fell to $13.7 billion.

Source: Dealbook - NYtimes