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Macaskill on markets: How Wall Street is exploiting Federal welfare

The Federal Reserve’s current balance sheet expansion is handing trading profits to big banks.


The fourth quarter of 2019 saw an unexpected bonanza in debt trading for banks. JPMorgan’s fixed income revenue of $3.4 billion marked a rise of 86% compared with the same quarter in 2018, while Morgan Stanley saw an increase of 126% to $1.27 billion.

JPMorgan’s chief financial officer Jennifer Piepszak had the grace to acknowledge that a surge in liquidity provision by the Federal Reserve contributed to the bumper quarter.

“The Fed balance sheet extension was for sure a tailwind for us,” Piepszak said.

Morgan Stanley’s chief executive James Gorman was more inclined to take credit for the bank’s strong results and berated stock analysts for once doubting his ability to deliver improved returns on equity.

Morgan Stanley’s markets revenues – and stock price – have actually been fairly closely correlated to the increase in the Federal Reserve balance sheet recently.

This may be a coincidence or it may reflect the extent to which central bank liquidity provision translates to improved revenues for a firm with a bias towards areas of fixed income such as securitized products and leveraged finance.

The proximate cause of the latest wave of Federal Reserve balance sheet expansion was a disruption in the repo markets in September 2019, when short-term rates had a brief but dramatic spike.

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