Chart of the day: US financial profits

By Felix Salmon
March 30, 2011
Kathleen Madigan had an important post on Friday, showing financial profits roaring back to more than 30% of all domestic US profits.

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Kathleen Madigan had an important post on Friday, showing financial profits roaring back to more than 30% of all domestic US profits. As she says, “that’s an amazing share given that the sector accounts for less than 10% of the value added in the economy” — and makes it “hard for banks to cry poverty” when it comes to things like debit-card interchange legislation.

Madigan gave us the percentage chart, which shows the finance industry taking an even greater share of total corporate profits than it did during most of the boom year of 2006.

percentage.png

But I wondered: how much of this is a function of generally lower profitability overall — a question more of a low denominator than a high numerator? So I went along to the BEA website and put together this chart:

profits.png

The blue line is total domestic profits. The green bars are the massive profits made by the Federal Reserve — an incredible $233 billion in 2010 alone. But as you can see, those Fed profits are dwarfed by the red bars, which are private-sector financial profits. Those dipped into negative territory just once, in the fourth quarter of 2008, and in the fourth quarter of 2010 reached an annualized $379 billion — bringing the total for the year to more than $1.3 trillion.

What this chart says to me is that nothing has changed, and nothing is going to change. Banks are still extracting enormous rents from the economy, and profits which should be flowing to productive industries are instead being captured by financial intermediaries. We’re back near boom-era levels of profitability now, and no one seems to worry that the flipside of higher returns is higher risk. Any dreams of seeing a smaller financial sector have now officially been dashed. And the big rebound in corporate profits since the crisis turns out to be largely a function of the one sector which we didn’t want to recover to its former size.

Update: Thanks to John Coogan for pointing out that the BEA already annualized the quarterly figures, as well as seasonally adjusting them. So I was wrong to add up all the quarterly figures for 2010 to get what I thought were annual figures. Sorry.

12 comments

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While the Financial Sector continues to make bigger profits from exporting productive industries to China, productive jobs will decline. This inexorably leads to the dominance of the Financial sector at the expense of all other sectors.

It is almost as if the Free Market Economy has changed from a model of efficient use of capital for the benefit of production to the efficient transfer of capital for the benefit of a smaller and smaller group of the already wealthy.

That is not healthy for any economy in the long term; sadly, politicians can only see as far as the next election so I don’t see any fix coming along until it is too late to change anything.

Posted by FifthDecade | Report as abusive

If you’re comparing profits to “value added”, the implication is that workers are underpaid compared to profits. What we need are bigger bonuses for the traders; that will get profits back in line with value added.

Posted by dWj | Report as abusive

Well, looks like they were right after all…there was a V recovery, just not in jobs.

Posted by GRRR | Report as abusive

The bank profits are not easy to change. A significant revenue stream is the total interest on all debt, which changes only slowly. The financial sector takes a major share of this revenue stream as it intermediates between borrowers and ultimate lenders by transforming maturities, packaging debt, managing portfolios, etc.

That share is now larger than ever as the Fed suppresses the interest rates paid to those ultimate lenders.

So one reason that the financial sector grew so large over the past few years is that the total debt grew so big. It will not shrink until the debt shrinks.

Posted by Hayes | Report as abusive

This assumes that the banks aren’t hiding losses on their books. I don’t know that they are, but neither do I have any confidence that they are being fully open.

Posted by TFF | Report as abusive

“This assumes that the banks aren’t hiding losses on their books. I don’t know that they are, but neither do I have any confidence that they are being fully open”

Has FASB 157 been quietly re introduced? If banks ‘marked to market’ the assets on their balance sheets, the ‘Big Five’ would all be insolvent.

End of Story.

Posted by crocodilechuck | Report as abusive

“If banks ‘marked to market’ the assets on their balance sheets, the ‘Big Five’ would all be insolvent.”

On 3/30/09 that statement was undeniably TRUE.
On 3/30/11 that statement is undeniably FALSE.

Look at BAC:
net tangable assets 12/31/08 =86.6 billion
net tangable assets 12/31/10 =144.5 billion

Banks have raised gobs of equity, retained all their earnings for 2 years, have lowered their cost of funds almost to zero, have had the Feds bid up the value of all the assets they hold… they are receiving almost LIMITLESS support at the moment.

I agree that there are still huge swaths of hidden losses banks intend to bleed out over time but if you marked everything to fair market tonight book value would actually go up on net due to the zero interest rate enviroment.

For all the attnetion given to TARP that “bailout” was chump change in comparison to the wealth transfer zero interest rate policy represents. Savers are being openly robbed by the goverment and the money is being given to borrowers and banks.

Note that the largest benificary of this policy is not the banking system but the goverment itself. A 200 basis point increase on 14 trillion amounts to 280 billion in increased interest payments annually.

Time to put everything on the table including taxes, entitlements, and defence.

Posted by y2kurtus | Report as abusive

While I’m all for a good bank bashing, it is not at all reasonable to suppose that an industry’s share of all profits should equal it’s share of all value added. This is because of different degrees of capital (and labour) intensity across different industries. If the financial sector is more capital intensive than the economy-wide average (which is a reasonable assumption), then you would expect that:

a) it’s share of profits should be larger than it’s share of value added (because the marginal product of capital is increasing in capital intensity); and

b) the wages it offers should be higher than the economy-wide average (because the marginal product of labour is also increasing in capital intensity)

even if there were no rent-seeking going on.

Posted by JohnBarrdear | Report as abusive

JohnBarrdear wrote one of the top 5 comments ever found on the internet.

Financial profits are simply a reflection of the amount of debt capital employed in the economy. There is more real capital (buildings, bridges, schools, manufacturing facilities) than ever before. To the extent these are financed through debt, banks as holders and intermediaries of debt will receive larger profits. It’s the capital intensity of the economy which has changed and that is all. Returns on assets at banks are no better today than historically, to my knowledge, although my research here has been cursory.

Posted by jeremycjohnson | Report as abusive

That’s why the call it the financial “industry” and its employees financial “engineers”.
And they all manufacture financial “products”.

Posted by Juan1 | Report as abusive

This is a very powerful chart. I am wondering what it would look like if you showed these figures from 1980 or some period going back 25-30 years, so we could see how much has changed over that longer period, since it seems to me that by 2001, the concentration of power in high finance was already at a high point. Can you point us to some resource on this question?

Thanks,

Pete

Posted by Pmanzo | Report as abusive

LOL @ dWj… seriously? You’re either being sarcastic or you’re totally missing the point. The traders and their bosses *are* the financial industry that’s draining the economy. Traders do not add value, except to the pockets of the financial industry… maybe you don’t understand what adding value means..?

Posted by AGreenhill | Report as abusive