Unstructured Finance

Wall Street channels Charles Dickens in 2012

December 27, 2012

By Lauren Tara LaCapra

As 2012 comes to an end, it’s clear that Wall Street has had the best-worst year in quite some time.

Bank profits are at record highs and lows, driven by free money from the Fed that they can’t make any money with, and a historically small number of historically huge deals. Facebook’s IPO – among the biggest ever – happened this year, and it was an enormous failure and a terrific success all at once.

And if that’s not enough to convince you, just take a look at the big-tiny payday that Wall Street employees are expected to get this year: bonuses for bankers, traders and money managers are supposed to rise up to 10 percent, in what a top pay consultant called one of the weakest years in a decade or more. Since big banks have been required to shift more bonus money into restricted stock with clawback provisions, some employees even feel like they’re getting punished by those bigger paychecks.

Perhaps 2012 was best summed up by Lloyd Blankfein, CEO of Goldman Sachs, who was asked earlier this year how he felt about the outlook for Wall Street.

“Gun to my head, I tend to be a little more positive,” Blankfein said on Bloomberg Television.

So, what’s with all the mixed messages, Wall Street?

Part of the problem is that banks don’t really know how much profit they’re going to be able to earn once all the new financial reform regulations are finalized and implemented. In addition to Dodd-Frank in the U.S., there are rules in the U.K. stemming from the Vickers report, as well as Basel III capital rules and even stricter regulations in Switzerland that have left banks like UBS and Credit Suisse pulling back dramatically.

Some executives and bankers have been looking on the bright side. They cite the term “creative destruction” – arguing that firms will prosper through innovation after they adapt to new rules. There will be pain as banks exit businesses, cut staff and implement new technology, but in the end things will turn out great.

Others take a much dimmer view, arguing that new regulations have permanently crimped earnings. They are the types that compare banks to utilities.

Then there have been a series of unique occurrences in 2012 that would make a casual observer’s view of Wall Street whipsaw back and forth: QE3, Greg Smith, Knight Capital’s software malfunction, the U.S. election and fiscal dilemmas in the U.S. and Europe.

As 2012 comes to a close, it’s not hard to see why it’s so hard to read the tea leaves. But it’s worth taking a look at what analysts are expecting from Goldman Sachs, whose profit statements are the cleanest representation of “Wall Street” earnings among all the big U.S. banks.

Sell-siders expect Goldman to report a profit of $6.1 billion, or $11.78 per share, for the year, more than double what it earned last year. They expect Goldman to bring in $32.3 billion in revenue in 2012, a 12 percent bump. Goldman’s shares have lately been trading at valuations not seen since a huge financial rally in the spring of 2009.

And yet for the foreseeable future – through 2015, at least – analysts don’t expect Goldman to report revenue or profits anywhere near what it was able to deliver in its best years. And maybe that’s really the takeaway: it’s not the best of times or the worst of times for Wall Street, it may just be the beginning of more ordinary times.

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