Chase earnings signal downturn for financial services

Jill Schlesinger Jan 13, 2012

Steve Chiotakis: We got the first big bank earnings report today, and it was from J.P. Morgan Chase. And it reported a lower profit in the last three months of the year, down by 23 percent. The European debt crisis and the sour economy weighed on investment deals and trading, it said.

Jill Schlesinger is editor-at-large at CBS/MoneyWatch. And she’s usually with us on Fridays from New York — but today, she’s with us here in the studio in Los Angeles. Hey Jill, welcome.

Jill Schlesinger: It’s a lot earlier here!

Chiotakis: Yes it is, than the time when you’re in New York. Unless you’re a shareholder — let’s talk about these JP Morgan Chase earnings. Why do we care about how they’re doing?

Schlesinger: You know, big banks, when they don’t make money, they really are starting to say, “well how do we deliver something of value to our shareholders?” And they’re going to try to make up the loss of investment banking and trading by what? By raising fees! And that’s where those consumers are going to go nutty because we’re going to see more and more bank fees pop up in places we’ve never seen them before. Check those statements carefully, I think you’re going to be unpleasantly surprised.

Chiotakis: All those fees to compensate. All right, so what’s new about this report? The economy’s supposedly getting better, right?

Schlesinger: Well you know, an interesting thing happened, at the bottom of the market, which is the spring of 2009, the Federal Reserve basically lowered rates and banks borrowed money for essentially zero percent. They went in and invested that money and made some easy money, right through about the end of 2010.

What this really says is less about the economy, that the easy money has been made already. These banks are having a harder time making money because you can’t just borrow at zero, invest, and make money. So they’re going back to old-fashioned things. They have to actually bid for deals, they have to get consumers to say, “yes, we want to use your services.” They have to convince people to go into their private wealth management. These are old fashioned notions; it is harder and harder for them to make money.

Chiotakis: That’s the wave of the future?

Schlesinger: I think it’s the wave of the near-term future.

Chiotakis: Anything can change, right?

Schlesinger: They’re ten year cycles, but the best days of big banks and Wall Street firms are definitely behind them… for a while. They’re going to go back to basics: it’s going to be harder for them to make money; they’ll reduce head count, they’ll reduce compensation. They need to right-size their individual businesses to match what’s happening in the sector and in the economy.

Chiotakis: We’re going to get a bunch of other bank earnings next week, of course. Do you think this gives us some sort of indication of what we’re going to see in those reports?

Schlesinger: I don’t think there’s much special about J.P. Morgan — although they may be the strongest of all the banks. I think we’ll see a very, very consistent message. Harder to make money, lower earnings; really, a much bleaker outlook.

Chiotakis: Bleaker outlooks for the banks in general.

Schlesinger: Yeah, for all the banks and everyone in financial services.

Chiotakis: Jill Schlesigner from CBS/MoneyWatch, live here in the studio with us, in Los Angeles. Jill, thanks.

Schlesinger: Great to be with you

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