Wall Street has worst quarter since crisis

The biggest Wall Street firms posted their worst quarter in trading and investment banking since the depths of the financial crisis as they face questions about the future of their business.

JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., and Morgan Stanley posted $13.5 billion in trading revenue minus accounting gains for the third quarter, down 35 percent from a year earlier. Investment-banking revenue plunged 41 percent from the second quarter, to $4.47 billion.

Bank of America posted a roughly 90 percent drop in fixed-income trading revenue, and Goldman Sachs had its lowest debt-underwriting quarter since 2003. Corporations put off capital raises and investors sold riskier assets on concern that the U.S. economy was slowing and Europe's debt crisis would spread.

"The micro has caught up with the macro, and the strains of the financial system have hit these companies," Charles Peabody, an analyst at Portales Partners L.L.C. in New York, said Wednesday on Bloomberg Television's Inside Track. "The question is, does that continue?"

The Standard & Poor's 500 Index dropped 14 percent during the quarter, the worst decline since the fourth quarter of 2008. The Chicago Board Options Exchange Volatility Index, or VIX, which measures the cost of buying insurance against drops in the S&P 500, surged 160 percent to its highest quarterly reading since the first three months of 2009.

Companies are grappling with questions about the potential impact of the Volcker rule, which seeks to ban proprietary trading and limit hedge-fund and private-equity investments at deposit-taking banks. Regulators seek feedback from banks after releasing a draft of the proposal.

Wall Street's fixed-income desks could suffer a 25 percent decline in revenue under one proposal contained within the Volcker rule draft that may target so-called flow trading, Brad Hintz, an analyst at Sanford C. Bernstein & Co., wrote in a note to investors earlier this month.

Banks shut down stand-alone proprietary trading desks in anticipation of the rule, which has already affected trading. Citigroup said its 73 percent year-over-year decline in equities-trading revenue, excluding debt-valuation adjustments, was driven by losses from a proprietary trading group it is closing.

Bank of America attributed part of its fixed-income revenue drop to the winding down of its proprietary-trading business, which contributed $434 million in the first half and zero in the third quarter.

The 10 largest global investment banks, which include the five U.S. firms, are likely to trim their head count of revenue producers by 5 percent in this year's second half, according to an August report from industry consultant Coalition Ltd.

"If the market's going to be and the economy's going to be such that the revenues are going to be lower, we're going to continue to take down the cost structure," Bank of America CEO Brian Moynihan said this week.