It was a weird year on Wall Street.
(Bloomberg) — It was a weird year on Wall Street.
While capital markets sputtered for much of the year, volatility pushed trading revenues to their highest levels in well over a decade. With inflation running at a 40-year high, banks were forced to set aside billions in credit reserves. That hindered profits even as the Federal Reserve’s campaign to tamp down prices — marked by aggressive rate hikes — boosted net interest income for the country’s largest lenders.
Along the way, firms cajoled even more of their staffers back to the office. Job cuts hit the cryptocurrency and fintech industries, which had long been recruiting workers away from Wall Street. And, following a sweeping probe, regulators cracked down on bankers using messaging apps for banter and other business communications.
Here’s a look at this year’s winners and losers across the US finance industry:
Winners: Macro Traders
Wall Street’s biggest trading desks are set to notch $109.6 billion in revenue for the year, the best performance since 2009. Most of that will come from fixed-income trading desks, where volatility handed commodities, currencies and rates traders one of their busiest years ever.
Nowhere is this more evident than at JPMorgan Chase & Co., where revenue is expected to jump 6.5% to $29.2 billion, the biggest haul among the five largest Wall Street banks. That includes a whopping $18.8 billion from fixed-income trading. That business got a new leader this year in Pranav Thakur, a 15-year veteran of the bank who previously oversaw foreign-exchange and emerging-markets trading globally.
Citigroup Inc.’s traders, led by Andy Morton, are set to hand the bank their second-best performance of any year dating back to 2009, an especially impressive feat given the bank’s push to rein in risk and limit business with less-lucrative clients. Morton took over as sole head of the trading division earlier this year after the departure of co-head Carey Lathrop.
Losers: IPO Bankers
Things are far less rosy for investment bankers, especially those involved in putting together initial public offerings. In all, equity-underwriting revenue is poised to plummet 77% this year to $4.2 billion across the five biggest Wall Street banks, the lowest level on record, according to data compiled by Bloomberg Intelligence. Last year, Morgan Stanley alone raked in more than that in IPO fees.
And the drop is hitting home. Bankers are paid on an “eat what you kill” model. That means firms are already warning staffers that their bonuses — which often make up the majority of pay for senior employees — will be down significantly this year. JPMorgan, Bank of America Corp. and Citigroup are all considering slashing bonus pools for their investment bankers by as much as 30%, Bloomberg News reported earlier this month. Some firms are planning to give low performers no reward at all.
Winners: Bank Loan Underwriters
The Fed’s aggressive plan to damp inflation with higher interest rates might have stymied capital markets this year, but it was good news for the trillions of dollars in loans banks are sitting on.
Banks were so eager to take advantage of rising borrowing costs that many lenders raised their rates within mere minutes of a Fed decision. Fifth Third Bancorp, for instance, took just eight minutes to inform customers that its prime lending rate would rise to 7.5% following the central bank’s most recent hike. In all, the four biggest US banks are expected to soak up $211 billion in net interest income this year, a 22% increase from 2021 and the biggest haul on record.
What’s more, while lenders have been eager to charge higher rates to borrowers, they’ve been slower to pass on benefits to savers who have stashed trillions of dollars of deposits with the country’s biggest banks, boosting their profitability. Industrywide, net interest margin — the difference between what banks collect on loans and pay for deposits — soared to 3.12% in the third quarter, reversing a yearslong slump.
Losers: FTX Investors, Customers
The final months of 2022 will be remembered forever as crypto’s “Lehman moment.” In November, the digital-asset exchange FTX blew up in a truly spectacular fashion, followed quickly by the arrest of founder Sam Bankman-Fried, who faces charges of defrauding investors in his crypto empire.
The 30-year-old crypto maven had raised more than $1.8 billion from the likes of SoftBank Group Corp., Temasek Holdings Pte., Tiger Global Management and Insight Partners. With the bankruptcy filings of more than 130 entities tied to Bankman-Fried, the equity stakes of all who had backed FTX effectively plunged to zero.
Customers of the exchange continue to question whether it mishandled their funds, with FTX facing an $8 billion hole in its balance sheet. John J. Ray III, who’s handling the exchange’s restructuring, has already warned former customers that many of them won’t get back funds lost in the company’s spiral into bankruptcy.
Bankman-Fried spent much of the time between FTX’s implosion and his arrest on a virtual apology tour, denying trying to commit fraud or break the law to media outlets around the world, while admitting to egregious managerial errors.
“I made a lot of mistakes,” he said late last month by video link at the New York Times DealBook Summit. “There are things I would give anything to be able to do over again. I didn’t ever try to commit fraud on anyone.”
Winners: Loyal Bankers
Financial-technology startups and cryptocurrency firms alike have spent years luring Wall Street workers with the promise of valuable stock options and a chance to trade in the wild — and potentially lucrative — digital-asset markets.
This year, both industries lost their luster. Venture-capital firms pulled back on funding fintech startups as they looked to prioritize companies already turning a profit rather than those chasing growth. Fintech funding dropped 64% to $12.9 billion in the third quarter, the lowest level since the depth of the pandemic, according to CB Insights.
The crypto winter — the Bloomberg Galaxy Crypto Index has slumped 68% this year — has also made life hard for the legions of former Wall Streeters who left their trading desks for the wild west of digital assets.
With both industries now cutting thousands of workers, those bankers who stayed loyal to traditional finance are among the year’s big winners, for now. Banking giants from Goldman Sachs Group Inc. to Citigroup Inc. have started trimming their workforces, and more cuts may be on the way.
Loser: WhatsApping About Deals
At the start of the pandemic, with bankers and traders trapped at home for months on end, employees at the country’s largest banks turned to WhatsApp and other outside messaging apps to stay connected. That ended this year with the culmination of a monthslong probe by US regulators into how global financial firms failed to monitor employees’ communications on unauthorized apps. A dozen banks agreed to pay $2 billion to settle the matter, the largest penalties of their kind.
As part of the investigation, the US forced Wall Street banks to embark on a systematic search through more than 100 personal mobile phones carried by their top traders and dealmakers. The requests had lenders rooting through years of office banter and even personal texts, with banks arranging for outside attorneys to help conduct the reviews.
Now, the world’s biggest banks have to hire compliance consultants to review how they monitor and archive any work-related communications, including on employees’ mobile phones or other personal devices. Call them the WhatsApp cops.
Winners: Banker Haunts
Legions of Wall Street staffers made their way back to offices a bit more regularly this year, with almost half of all employees in the New York metro area back at their desks, according to card-swipe data from Kastle Systems. That’s meant wonders for the thousands of small businesses across the city that rely on worker foot traffic.
Take Monkey Bar. The tony restaurant in midtown Manhattan closed during the pandemic but finally reopened this year. It’s long been a popular haunt for dealmakers to take their power lunches and meet clients for happy hour. Now, many of the steakhouse’s reservations on Resy book up minutes after they become available.
Or wander over to nearby Papillon Bistro & Bar, a popular happy-hour spot located near Jefferies Financial Group Inc. On many weekdays, the bistro is packed with young bankers in Patagonia vests and Loro Piana ankle boots.
“The restaurant hosted just over 20 corporate holiday events last week,” said Carly McLaurin, event coordinator for Celtic Developers Group, which owns Papillon. “Even with most tables and spaces booked, our regulars will pack into the bars to enjoy their after-work beer.”
Losers: High-Flying Fintechs
The worst performer in a basket of 75 information-technology companies this year was PayPal Holdings Inc., the pandemic darling that at one point was worth more than Citigroup and Goldman Sachs combined. The fintech’s stock has plummeted 63% this year, shaving a whopping $141 billion off its market capitalization.
At issue, analysts say, is the fact that growth hasn’t been as good as it was during the pandemic, when consumers were stuck at home and doing much more of their shopping online.
PayPal’s big drop has had implications for the rest of fintech, with closely held firms benchmarking their own private valuations to that of the tech giant. One by one this year, companies including Stripe Inc., Checkout.com and Klarna have been forced to lower their valuations in line with those of publicly traded peers.
“The shift in Klarna’s valuation is entirely due to investors suddenly voting in the opposite manner to the way they voted for the past few years,” Michael Moritz, a partner at Sequoia, said when Klarna announced its latest fundraising in July. “Eventually, after investors emerge from their bunkers, the stocks of Klarna and other first-rate companies will receive the attention they deserve”.
Winners: Points Junkies
For credit—card points junkies, 2022 was the year of the airport lounge.
JPMorgan opened its first Chase Sapphire Lounge in Hong Kong this year, while Capital One Financial Corp. also debuted a lounge of its own in Dallas. The king of airport lounges — American Express Co. — is in the process of expanding and reopening its Centurion Lounges at San Francisco International Airport and Seattle-Tacoma International Airport with new outposts planned for Hartsfield-Jackson Atlanta International Airport and Newark Liberty International Airport.
And gone are the days of lousy sandwiches and uncomfortable furniture. AmEx has outfitted some of its locations with everything from percussion massage therapy offerings to nail-buffing services. Capital One announced it’s partnering with José Andrés Group on new lounge concepts it’s testing out in New York and Washington airports, with Spanish-style tapas set to appear on menus.
Loser: Warren Buffett
While the Fed’s moves to fight inflation boosted net interest income for the biggest lenders, the central bank also sparked fears it would send the US economy into a painful recession. That would probably cause credit losses to soar, ultimately hurting lenders’ profits.
That’s meant bank investors including the likes of Warren Buffett’s Berkshire Hathaway Inc. have seen the value of those holdings plummet in recent months. Weary investors shaved a quarter of a trillion dollars of market value off the four biggest US banks this year alone.
No major bank has had it worse than Bank of America, which counts Berkshire Hathaway as its largest shareholder and has seen its stock drop about 29% since the start of 2022. That shaved about $13 billion off the Oracle of Omaha’s stake this year alone. Even so, he’s still roughly doubled his money. In the first quarter, Buffett also took a 2.9% stake in Citigroup, which posted the second-worst stock performance among major banks, with a 27% drop for the year.
–With assistance from Noah Buhayar, Hannah Levitt, Katherine Doherty and Sridhar Natarajan.
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