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The common view is that the employees at these firms are so smart, innovative and connected that they will find some way to get out of the mess they created, dodge the new regulatory constraints and eventually return to minting money.īut it’s now looking as if that will never happen. Investors and analysts have been giving the banks the benefit of the doubt, but have since been sorely disappointed. Lower leverage levels meant lower returns on investments.ĭespite the structural changes, the banks still maintain that they will be able to boost their returns on equity back up to double-digits, close to where they were before the crisis. Higher capital requirements meant less money to use for trading. Goldman and Morgan became bank holding companies like rivals JP Morgan and Bank of America (BAC) and were therefore forced to scale back on their risk taking. The second was the string of regulatory changes that forced the banks to cut risk and maintain larger capital buffers. The first was that several of the major players in the space ceased to exist.
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There were two major structural changes that took place in the industry in the aftermath of the crisis that shook the trading world.
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Nevertheless, ROE, while it has its flaws, is still a metric that investors and analysts like to see as it flattens out the sector, allowing them to compare it with other asset classes. There are dozens of other performance metrics that banking chieftains target, which are specific to the banking model. To be sure, ROE isn’t the be-all-end-all metric that Wall Street lives by. But its executives quietly dropped that goal in May after it became clear that its trading division was having some troubles. Goldman promised earlier in the year that it would hit a respectable 20% ROE in 2011. For the level of risk and amount of capital these firms hold, single digit returns on equity is pretty lousy - and the banks know it. But the firm is still below its pre-crisis ROE of around 13% in 2007.Īll this means nothing unless it is put in context. JP Morgan (JPM) fared a bit better with an ROE of 10.2% for the year, up slightly from the 9.7% it hit in 2010. Morgan had a 9% ROE in 2007 and averaged an annual 20% ROE from 2000 to 2006. Morgan Stanley’s (MS) ROE came in at 6% for the year, down from 7% in 2010. But it wasn’t just Goldman who sputtered. Before the financial crisis hit, Goldman’s ROE was an industry-leading 32% in 20. Goldman Sachs’s (GS) annual ROE came in at a shockingly low 3.7% for 2011, down significantly from 11.9% the previous year. Given the lumpiness of bank earnings, it is best to look at full-year results as opposed to quarterly results.