Investment banks got paid a lot of money to structure and sell bad mortgages; they're also getting paid pretty nicely to clean up the mess.
Every quarter, Thomson Reuters takes a look at how investment banks make their money and who's paying them. They're usually called "league tables," because it sounds sportier and more glamorous, and because investment bankers, like everyone else, would rather think of themselves as sports stars. It could also be because league tables are also pretty easily gamed, and banks are always bickering over whether they should get more credit than they do.
The investment banking business is actually not terribly complicated. Investment banks make their money in one way: finding companies that are buying something, and finding companies that are selling something, and then pairing them up. The banks do that in four main businesses: mergers and acquisitions, or M&A; helping companies sell stock; helping companies sell bonds; and making loans.
As in sports, Wall Street is obsessed with measuring its progress in numbers. Which brings us to the league tables for the first quarter of 2011. These measure how much business the major investment banks have done between January 1 and March 31.
But more interesting than what happened during the first quarter is what has happened since 2008. Thomson Reuters created a list that showed that the major source of business for the investment banks for the past two years has been - of course - the federal government.
Thomson Reuters has a nice list of the companies that paid the most fees to Wall Street between January 1, 2009 and March 31, 2011: count the bailout babies for yourself. (I put the year they paid the most fees in parentheses).
- Fannie Mae: $1.6 billion ($941 million in 2010)
- Freddie Mac: $1.25 billion ($600.4 million in 2010)
- Citigroup: $1.14 billion ($830.7 million in 2009)
- AIG: $980 million ($617.5 million in 2010)
- Sumitomo Mitsui Financial Group: $938.4 million
- Federal Home Loan Banks: $816.3 million ($393 million in 2010)
- HSBC $807.1 million
- Government National Mortgage (Ginnie Mae): $800.6 million ($452.9 million in 2010)
- Bank of America Corp.: $760.3 million ($630 million in 2009)
- German State Entities: $715.5 million
What are all those foreigners doing there? Well, the foreign banks all had non-bailout reasons to pay fees. Sumitomo bought and sold shares from Goldman Sachs. HSBC turned down a British government bailout and sold $19 billion of shares to raise enough money to buy other banks. "German state entities" is too vague to worry about for now.
You'll notice a trend: The two U.S. banks on this list - Citigroup and Bank of America - that took bailout money paid the most fees in 2009. That makes sense; it was the year of the Federal Reserve's stress tests, when regulators were pushing the banks to raise money to shore up their shaky finances. Every time the banks raised money for themselves, they would have to pay other banks to help find buyers for all that stock.
But last year - well after the stress tests - the story of investment banking fees was all about mortgages. The biggest fee-payers in 2010 were the companies with big mortgage businesses- like Fannie Mae, Freddie Mac, Ginnie Mae, AIG, and the Federal Home Loan Banks.
But even though these numbers look very good for investment banks, it's not all delightful money rolling into the coffers. All those mortgage companies and bailed-out banks took the place of investment funds who used to provide Wall Street with a lot of repeat business.
These investment funds are known as private equity funds. Private equity funds buy struggling companies using a lot of loans, then turn around the companies and use the profits to pay back the loans. (At least, that's how it's supposed to work). Usually, that would mean lots of fees for investment banks: merger fees when the private equity funds bought the companies, loan fees when they borrowed money, IPO fees if the company went public and merger fees if the company was sold.
But in 2007 and 2008, many private equity funds overpaid for companies and ended up struggling to pay back the debt. The private equity funds weren't buying, weren't borrowing and weren't selling. So those fees started to dry up in 2008, when the financial crisis hit the markets hard.
Private equity firms seem to be making a comeback: Kohlberg Kravis Roberts & Co. bought gel-capsule maker Capsugel from Pfizer this week for $2.3 billion, and Apollo Global Management started a new life as a public company just before that. But it's an open bet whether they'll ever be driving Wall Street riches the way they used to. Luckily, there's always Uncle Sam.