Wall Street on Track for Record in Profits

Ten months ago, President Obama said a time would come for Wall Street to make profits and pay bonuses, but “now’s not that time.” But it appears that was exactly when Wall Street began to return to profitability.

Outside the New York Stock Exchange in lower Manhattan.
Photo: Oliver Quillia for CNBC.com
Outside the New York Stock Exchange in lower Manhattan.

In a report released Tuesday by Thomas P. DiNapoli, the comptroller of New York State, Wall Street profits in 2009 are on track to exceed the record set three years ago, at the height of the credit bubble. The report noted that the four largest investment firms in Manhattan — Goldman Sachs , Merrill Lynch, Morgan Stanley and the investment banking arm of JPMorgan Chase — earned $22.5 billion in the first nine months, in contrast to losses of more than $40.3 billion in 2008, primarily at Merrill.

“The national economy is slowly improving, but Wall Street has recovered much faster than anyone had envisioned,” Mr. DiNapoli said in a statement.

Net revenue at the four firms, which excludes interest expenses, reached a high of $57.7 billion in the second quarter, Mr. DiNapoli said. Though total revenue has been higher in previous quarters, the banks benefited from a sharp decline in interest payments, $5 billion in the second quarter from a high of $76.3 billion in the last quarter of 2007.

Fueling the gains were extraordinary profits from the firms’ own securities trading accounts as they borrowed at near-zero interest rates and put the money to work in the securities markets. Member firms on the New York Stock Exchange earned a record $35.7 billion for their broker-dealer operations in the first six months, $8.9 billion more that the previous high in 2000, the state comptroller said.

In turn, the profits are contributing to a resurgence of bonuses on Wall Street. Six of the top American bank holding companies set aside $112 billion for salaries and bonuses, including deferred payments, in the first nine months, Mr. DiNapoli reported. The six banks are Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo.

If the profits continue, bonuses at the six banks could exceed the $162 billion paid 2007 — the year before the financial crisis hit stock markets. Though compensation has rebounded at the four largest banks, Merrill Lynch, now part of Bank of America, and Morgan Stanley reported a decline in overall compensation.

Employment in the securities industry in New York City fell by 28,300 jobs since its peak in November 2007, the comptroller said. The report predicts, however, that job losses in the sector are unlikely to exceed 35,000 by the end of the year, a much smaller number than previously forecast.

The gains in compensation will not necessarily be reflected in New York’s tax collections because the compensation overhaul could cause firms to sharply restrict cash bonuses.

The amount of business tax credits accumulated by Wall Street firms from last year’s record losses could also restrain tax receipts, Mr. DiNapoli said.

He estimated the decline in tax collections from Wall Street-related activities next year could be 5 to 20 percent.

“Wall Street remains the engine that drives New York’s economy,” Mr. DiNapoli said in a statement. “It’s encouraging that the industry is recovering faster than forecast.”