Business Back to Normal as Big Banks Turn Big Profits

Goldman Sachs and its brethren have little to complain about.

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The sky that was supposed to fall on the banking industry is looking awfully blue.

Wall Street banks, as you might recall, are the beleaguered victims of everybody else's misplaced ire. President Barack Obama derided them as "fat cats." The Dodd-Frank financial regulations constrained their ability to make an honest profit. The Federal Reserve clamped down on perfectly reasonable overdraft charges and credit card fees. The Consumer Financial Protection Bureau routinely hounds them about every penny-ante charge that's not disclosed on a billboard.

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Ever since the economic recovery made it safe for banking executives to show their heads again, executives such as Jamie Dimon of J.P. Morgan Chase and Lloyd Blankfein of Goldman Sachs have griped about tough new rules that make it harder for banks to take risks and earn the outsized profits that often go with them. Last year, Standard & Poor's estimated that new regulations could cut pre-tax profits at eight big Wall Street firms by as much as $34 billion per year.

Somehow, the banks have managed to survive. In the first quarter of this year, Goldman Sachs posted a $2.26 billion profit. J.P. Morgan earned $6.5 billion and Citigroup rang up $3.81 billion in net income. All three banks beat analysts' estimates. Financial services stocks have outperformed the broader market by about four percentage points during the last year, and the stable U.S. banking sector is one big reason the U.S. economy is recovering – while Europe's, by contrast, remains mired in recession.

It's no accident the nation's big banks are performing so well. No industry has benefited more from federal bailouts and the Federal Reserve's easy-money policies than Wall Street. Citi, Bank of America and many other banks owe their very survival to the unpopular TARP bailouts. Others, such as Goldman and J.P. Morgan, argue correctly that they didn't need the bailout money Washington forced upon them, yet they've nonetheless gained from policies meant to support the entire financial industry.

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The Fed's "quantitative easing" strategy has lured many spooked investors back into the financial markets, where banks make money on trades and volume. The Fed has also helped persuade business leaders it's safe to launch public offerings and conduct mergers and acquisitions, which generates investment-banking income for Wall Street. The low interest rates engineered by the Fed have helped boost home and car sales and the profitable lending that goes with them.

Even though Wall Street largely caused the 2008 financial collapse, policies meant to revive the economy have focused on the financial sector, because it's the lifeblood of the economy. Returning to normal levels of hiring, consumption and other types of economic activity requires confidence in well-functioning credit and financial markets.

It's probably true that Wall Street profits would be higher if the feds weren't nagging them constantly about playing it straight. There's undoubtedly overkill in the new rules foisted upon the financial industry by politicians and bureaucrats. Yet Wall Street wouldn't be facing such interference if it were better able to police itself.

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In New York City, financial-industry employment has shrunk by about 10 percent since 2008, while the average worker earns about $363,000 per year. Bonuses in 2012 rose by 8 percent, according to the New York State Comptroller, which is about four times the rate of inflation. Many industries have lost far more jobs, and virtually no industry can claim such high pay. It's good to be a banker, no matter how unpopular it might make you.

Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.