Randomly Noted

J.P. Morgan reported some strong earnings today. But what this bloggers eye were some of the sub-numbers in the earnings report. The bank booked $1.8 billion in investment banking fees. But don’t be fooled – that wasn’t from big M&A advising. But $429 million was in advisory fees. Instead, that $1.3 billion + remaining fees number came from equity and debt underwriting, with the big piece coming from debt – a quarterly record of $971 million for the bank.

Grouped under the investment bank is also trading – and fixed income once again ruled the day. Of the $6.6 billion of revenues from “fixed income/equities,” $5.23 billion came from fixed-income. The bank didn’t offer a break down i.e. how much was from FX trading, for example.

Finally, the investment bank (trading and traditional IB) contributed about 43% of the firms net income ($2.37 billion of a total $5.5 billion).

A quarter where the investment bank didn’t carry the whole day, er quarter, but carried a lot of it.

A look at Morgan Stanley’s earnings report today is yet another example of how the not-very-sexy businesses can be good ones to be in. When people think of Wall Street, they think of investment bankers and traders. And often we hear about the larger-than-life deals and money these folks make. But the banking and trading business can be very volatile, whereas the wealth management business may not grow as steadily but is, well pretty steady.

At Morgan Stanley, the firm reported wealth management revenues in the most recent quarter were $3.1 billion. The quarter before (this year’s 2Q): $3 billion. And the year-ago 3Q was $3.0 billion.

Institutional securities had $2.8 billion of revenues in the most recent quarter. It was $4.5 billion last quarter and $5.0 billion the year before.  In a sense, Morgan has created a hedge against the volatility brought on by sales and trading by being in the wealth business.

Senator Pryor asks this question. Dan Sparks hems and haws. Says he hasn’t thought about it enough to respond. Josh Birnbaum says it’s complicated – too much credit sloshing around - and says we all contributed. Sparks concurs. I say: Yes, that’s right. Goldman and many other institutions and individuals brought the economy down. The financial crisis was a collective cultural failing. The only truly interesting and relevant issue in the Goldman hearing is this: Should Wall Street bankers behave more ethically by selling only products they believe in? The answer: It’s up to the bankers and their employers. The rest of us need to invest more prudently. (By the way, the core issue isn’t about banks’ disclosure obligations- customers of the notorious CDO had access to info about the toxic junk it contained.)

“A second-lien subprime deal” – Goldman’s Dan Sparks has just told the Senate hearing about a particular product the bank was peddling and it was chock full of this stuff. Second-lien subprime! If the buyers – sophisticated financial firms – didn’t beware, it was their own fault – assuming they knew they were betting long on synthetic products based on American homes with two liens. TWO LIENS! If Goldman managed to sell this cr*p, well, that’s their prerogative. As Sparks has just said, a lot of clients had “appetite” for this stuff.

Let’s say you’ve been called to testify before a Senate committe after the SEC has charged your employer with fraud. Do you shift into tearful Oprah confessional mode? Or do you answer minimally? Duh! The senators feigning outrage that the Goldman guys aren’t fessing up are, well, feigning outrage. They’re accusing the Goldman bankers of dodging questions but I actually think the bankers are playing it straight, and smart: when they sold products they weren’t functioning as investment advisers to buyers. They were selling products that didn’t come with warranties – these weren’t vacuum cleaners.

Make no mistake about it: Goldman Sachs is a trading firm. The company reported very strong sales and profits today. And much of it was driven by trading in fixed-income, currencies and commodities. And it wasn’t all done by Goldman’s proprietary traders – the firm saw a big pickup in customer activity. And a pickup it was. Spreads were tighter, which mean middle men in a trade make less. And volatility was lower, which means fewer trading opportunities existed. That said, the firm saw trading revenues pick up sharply. How important was that fixed-income, currency and commodities increase? It was 41% of revenues in the last quarter. You see where it is now.

Morgan Stanley missed 2009′s broad market rally and yet is poised to pay its bankers proportionately more than a far savvier Goldman Sachs , which played its cards just right and has enriched its customers, shareholders and, yes, bankers. What’s up at MS, and why does the investment bank appear to be taking from shareholders and giving to lackluster bankers? Have a look at our coverage of Morgan Stanley’s 91% drop in third-quarter earnings from a year ago: its quarterly compensation expenses were $5.0 billion, or 57.5% of revenues. At Goldman, which reported earnings last week, compensation came to 43.3% of third-quarter revenues. But Morgan earned $757 million compared with a whopping $3.19 billion for Goldman. As the French say, tout ca change … Granted, there are problems with Goldman’s fat payouts; were it not for taxpayers’ largesse – and, arguably, Goldman’s high-level government connections – it wouldn’t be quite the powerhouse it is. The NYT’s Frank Rich is among those doing their best to take it down a peg. My focus today is on Morgan Stanley and its shareholders, who should feel disgruntled at the bank’s return to payola practices at a time when it needs to be compensating those who’ve held onto its shares even as it has turned in a roundly mediocre performance. Indeed, its chief financial officer, Colm Kelleher, is spending the morning chatting to repoters and analysts about the bank’s efforts to remake its business model and talking up its M&A and IPO pipeline. We shall see if Kelleher & Co. figure out how to earn their take.