The banks: here we go again?

[tonym911]

Suddenly all the banks are posting absolutely huge 'profits' once more. Are these profits real, ie immediately accessible, or (as I suspect) only available in theory? Are profits real if the process of claiming them results in the total collapse of the banking industry (as seems to be the consequence)?

I looked up the definition of 'profit' and got 'the positive gain from an investment or business operation after subtracting for all expenses.' The key word there being 'positive'. I understand how a manufacturing industry makes real, positive profit by taking raw materials, adding value to them and then selling the result for more than it cost to make it. That gives them cash, or real profit. Even other financial concerns other than banks (eg insurance companies) get real money from their customers. But it seems that banks' huge profits are paper only, generated within the system from nothing and totally dependent on a system of 'non claiming'. As such, are these so-called profits not completely notional and therefore not real? And are we therefore not going down exactly the same route to disaster as before?

Doubtless others will be able to explain this. I just don't get it. Then again, I'm clearly no economist.

[louiebaby]

Profit and cash flow are two VERY different things.

[Ozzie Osmond]

Writing back bad and doubtful debts....

[Bing o]

tonym911 said:

I looked up the definition of 'profit' and got 'the positive gain from an investment or business operation after subtracting for all expenses.' The key word there being 'positive'. I understand how a manufacturing industry makes real, positive profit by taking raw materials, adding value to them and then selling the result for more than it cost to make it. That gives them cash, or real profit. Even other financial concerns other than banks (eg insurance companies) get real money from their customers. But it seems that banks' huge profits are paper only, generated within the system from nothing and totally dependent on a system of 'non claiming'.

So what are commissions, sales spreads, market making, M&A consultancy fees, portfolio management fees, prop trading etc etc?

[tonym911]

If banking is such an easy business to 'make' huge money in, as it clearly seems to be, why aren't we all doing it? On a very simple basis (and I do apologise for my naivety here) it can only be because these 'profits' aren't real. They only exist within the banking bubble, not outside it in the real world. If any bank decides it wants to realise its 'profit' by calling in the loans, debts etc in a systematic fashion, the whole pack of cards drops as everyone realises there is nothing substantive at the base of it all. Banks are like the world's richest goldfish: take them out of their own environment and they're dead. The worrying thing is that we seem to be heading down the same disastrous route all over again.

[fido]

tonym911 said:

If banking is such an easy business to 'make' huge money in, as it clearly seems to be, why aren't we all doing it?

Good point. Better apply for a job in IB then .. http://www.efinancialcareers.co.uk

[Bing o]

tonym911 said:

If banking is such an easy business to 'make' huge money in, as it clearly seems to be, why aren't we all doing it? On a very simple basis (and I do apologise for my naivety here) it can only be because these 'profits' aren't real. They only exist within the banking bubble, not outside it in the real world. If any bank decides it wants to realise its 'profit' by calling in the loans, debts etc in a systematic fashion, the whole pack of cards drops as everyone realises there is nothing substantive at the base of it all. Banks are like the world's richest goldfish: take them out of their own environment and they're dead. The worrying thing is that we seem to be heading down the same disastrous route all over again.

Bing o already said:

So what are commissions, sales spreads, market making, M&A consultancy fees, portfolio management fees, prop trading etc etc?

[bobbylondonuk]

Ozzie Osmond said:

Writing back bad and doubtful debts....

Most of the huge increases in profit are the above category of investments and assets that were written down in the previous years that contributed to huge losses.

[tonym911]

Bing o said:

tonym911 said:

If banking is such an easy business to 'make' huge money in, as it clearly seems to be, why aren't we all doing it? On a very simple basis (and I do apologise for my naivety here) it can only be because these 'profits' aren't real. They only exist within the banking bubble, not outside it in the real world. If any bank decides it wants to realise its 'profit' by calling in the loans, debts etc in a systematic fashion, the whole pack of cards drops as everyone realises there is nothing substantive at the base of it all. Banks are like the world's richest goldfish: take them out of their own environment and they're dead. The worrying thing is that we seem to be heading down the same disastrous route all over again.

Bing o already said:

So what are commissions, sales spreads, market making, M&A consultancy fees, portfolio management fees, prop trading etc etc?

Hi Bing o, sorry, I wasn't ignoring you, appreciate what you're saying here but ultimately what's at the bottom of all the activities you mention? Who is 'losing' in order that banks can 'win'? I'll happily put my tin hat on here as it's worth a bit of ridiculing to get an explanation I can (a) understand and (b) believe.

[tonym911]

fido said:

tonym911 said:

If banking is such an easy business to 'make' huge money in, as it clearly seems to be, why aren't we all doing it?

Good point. Better apply for a job in IB then .. http://www.efinancialcareers.co.uk

Well yes why not I wouldn't be able to work in this sector unless someone could convince me that I wasn't doing something inherently a bit evil. Not that they'd have me anyway.

[Bing o]

tonym911 said:

Hi Bing o, sorry, I wasn't ignoring you, appreciate what you're saying here but ultimately what's at the bottom of all the activities you mention? Who is 'losing' in order that banks can 'win'? I'll happily put my tin hat on here as it's worth a bit of ridiculing to get an explanation I can (a) understand and (b) believe.

No-one is losing. (Well, some people do, I lie).

Non-losing activities for example would be something like M&A work. The bank takes a fee for structuring a deal to enable corporate A to buy corporate B by providing consultancy and expertise that the client doesn't have with regards to debt financing, as well as underwriting the IPO.

The money banks make from ordinary share transactions, where they are not the principal gives fund managers and other investors access to the stock markets without having to pay for the infrastructure - obviously this service costs, and the bank will charge a fee to cover there costs and make a bit on top, the same as any intermediary would in any business.

[fido]

tonym911 said:

Who is 'losing' in order that banks can 'win'?

I used to work in the Wealth Management side. I suppose the losers would be the investors (sovereign wealth funds, pension funds, private banking, individual investors) who we charged a % management fee. Some of that is used to pay structurers, legal teams, accountants, brokers, salespeople, technicians and a whole plethora of support staff. After bonuses, what's left over is profit .. and the Chrimbo party we didn't have

[tonym911]

I think this is the crux of it for me. There must be losers in the banking game. That doesn't seem to be the case in non-banking industries where value is added and genuine wealth created (puts tin hat on again!).

[Bing o]

tonym911 said:

There must be losers in the banking game. That doesn't seem to be the case in non-banking industries where value is added and genuine wealth created (puts tin hat on again!).

For the 3rd/4th time, banks create value through consultancy services like Mergers and Aquisitions and Wealth Management. No-one loses - the client pays for a service that they receive.

[Marf]

tonym911 said:

Doubtless others will be able to explain this. I just don't get it. Then again, I'm clearly no economist.

Lets make this simple.

You need money.

I know someone who can lend you money.

I put you in touch with that person.

No goods have changed hands, but I have charged you 2% of the loan value to put you in touch with a lender.

There are also other services as mentioned above.

[munky]

Not sure why we need yet another thread on the same topic. If the OP doesn't understand what banks do, he should buy a book or read one of the other dozens of threads on PH

HSBC has just released good results. A world class company (something we have very few of these days) right here in the UK, and people bash it "ah, can't be real, blah blah blah". London is the financial centre of the world, an exporter of financial services. This means it benefits the UK balance of payments. But no, us Brits aren't comfortable with being good at something, better to stamp on it from a great height and drive it overseas.

[Legend83]

Bing o said:

For the 3rd/4th time, banks create value through consultancy services like Mergers and Aquisitions and Wealth Management. No-one loses - the client pays for a service that they receive.

Is the OP talking about fees charged by banks for services or is he talking about internally generated profit generated from spread-bets, CFDs, forward contracts, other complex derivatives where an asset is not physically bought?

I can understand confusion around who wins and loses where someone "invests" in the movement of an asset price, not actually in the asset itself.

[tonym911]

Bing o said:

tonym911 said:

There must be losers in the banking game. That doesn't seem to be the case in non-banking industries where value is added and genuine wealth created (puts tin hat on again!).

For the 3rd/4th time, banks create value through consultancy services like Mergers and Aquisitions and Wealth Management. No-one loses - the client pays for a service that they receive.

No need to get shirty there old bean, I understand perfectly what you're saying. In response I would say that if the fees for these services are solely responsible for generating the multi-billion profits we're now seeing, then either those fees are pretty bloody high, or the amounts of money that these functions are servicing must be unfathomably immense, or possibly both. At the end of the chain there must be truly massive sums of money which somehow generate smaller (though still massive) sums simply by being moved around. I still don't see where the genuine wealth-creation part comes in. My contention is that it actually doesn't happen, and that the continuing survival of the system depends utterly on and (a) the shark principle of constant movement and (b) nobody rocking the boat by calling the system to account. Which is what happened three years ago. Would love to feel that this is not going to happen again, but with the same system in place and no real efforts to regulate it, why wouldn't it?

[Bing o]

I think we are wasting our time. It's always nice on a Monday, when one of your colleagues has been made redundant, to then have your entire profession be called evil, and to try and explain why and how some functions work, and the value that they add, that the OP then decides to ignore.

[Marf]

tonym911 said:

Would love to feel that this is not going to happen again, but with the same system in place and no real efforts to regulate it, why wouldn't it?

Because the financial instruments which sewed the seeds of uncertainty in the capital markets are now like the smelly kid in school. No-one will go near them.