Another free lunch for investment banks

by | Aug 6, 2009


The Bank of England today decided to inject another £50bn into its asset purchase facility. Since February, it has already spent £125bn buying bonds from UK investment banks to try and support the credit markets.

Thanks to this and other quantitative easing by the Fed (spending $1.25tn on MBS alone), the ECB (won’t say how much its spending) and other central banks, this has been the best six months ever for investment banks’ fixed income teams.

JP Morgan, for example, made $2.2bn in investment banking fees in the second quarter, which is a record on Wall Street. Goldman Sachs made about $6bn in fixed income trading in the first six months. Barclays Capital made £1bn in profit in the second quarter. Its head of investment banking, who I interviewed a few weeks ago, told me ‘It’s been a phenomenal six months for fixed income.’ HSBC also made the most its ever made in investment banking, making $6.3bn in profit in the first six months. Happy days are here again.

So our present economic system is quite simple really: central banks print money, then give it to private investment banks.

And no one criticizes this enormous free lunch. No one is really even aware it’s going on. Evan Davis on the Today show this morning discussed the BoE’s asset purchase facility, and his two interviewees were a person from the British Chamber of Commerce, and the UK economist of Goldman Sachs. Both were in support of the programme, surprisingly enough. At no point did Davis suggest the facility was a huge free lunch for investment banks. Instead, he concluded ‘it doesn’t seem to do any harm’.

In fact, the only criticism I can find of the asset purchase facility comes from the unlikely source of the head of fixed income research at Schroders, Jamie Stuttard, who says in passing that one of the unintended consequences of the facility will be:

New sellside profits as a direct result of government policy (riddle me this: what will happen to bonuses of RBS traders linked to trading book performance when those traders should be making very neat turns out of the gilt & corporate bond programs ??)

Quite.

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    Jules Evans is a freelance journalist and writer, who covers two main areas: philosophy and psychology (for publications including The Times, Psychologies, New Statesman and his website, Philosophy for Life), and emerging markets (for publications including The Spectator, Economist, Times, Euromoney and Financial News).


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