Free lollipops at the teller... JPMorgan Chase, Goldman Sachs, and Citi all announced expectation-beating earnings driven by record trading revenues. The Fed has been on a corporate bond buying spree, lending companies money at near-zero interest (to grease up the economy). Banks cashed in on underwriting and trading all those bonds. Stock trading also surged on corona volatility (banks made bank on that, too).
- JPM's overall trading revenue surged almost 80% to a record. Bond trading revenue doubled, helping JPM rake in $4.7B in profit from April - June.
- Goldman's bond trading revenue soared 150% for its biggest earnings win in 10 years.
But this was a very unusual quarter... because of the multi-trillion dollar cash cushion the government unleashed on the economy. The Fed's massive bond-buying spree brought cash into banks. Financial safety nets, like stimulus checks and extra unemployment benefits, led to Americans' income actually rising 10% in April (despite extreme unemployment). Now...
- Some safety nets are closing: The extra $600/week in unemployment benefit is set to end next week. Yesterday, the 3-month delay for tax filing ended.
- JPM said loan defaults had been limited thanks to the gov's financial stimulus boosts. Now that benefits are ending, that could change.
Banks aren't celebrating yet... JPM CEO Jamie Dimon thinks the worst of the recession lies ahead. Now that the big stimulus training wheels are coming off, many might not be able to pay back their loans, so banks are setting aside massive amounts of cash in advance to cover these expected losses. JPM, Citi, Goldman, and Wells Fargo saved $30B for these loan-loss provisions this quarter (on top of over $19B last quarter). They're prepping for an economic storm.