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Wall Street Report 2009

Wall Street Report 2009

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Published by ycharts
The global financial crisis was rooted in excessive
risk-taking, which exposed the financial industry
to historic losses when underlying assumptions
proved faulty. As the crisis unfolded, it claimed
thousands of jobs, saw the demise of storied firms,
fundamentally transformed Wall Street, and
precipitated a global recession and a fiscal crisis
for New York State and New York City.
• The broker/dealer operations of New York Stock
Exchange member firms earned a record
$35.7 billion in the first half of 2009—more than
one and a half times the previous annual peak.
• Net revenue totaled $91.4 billion in the first half,
compared to $35 billion in the first half of 2008.

The global financial crisis was rooted in excessive
risk-taking, which exposed the financial industry
to historic losses when underlying assumptions
proved faulty. As the crisis unfolded, it claimed
thousands of jobs, saw the demise of storied firms,
fundamentally transformed Wall Street, and
precipitated a global recession and a fiscal crisis
for New York State and New York City.
• The broker/dealer operations of New York Stock
Exchange member firms earned a record
$35.7 billion in the first half of 2009—more than
one and a half times the previous annual peak.
• Net revenue totaled $91.4 billion in the first half,
compared to $35 billion in the first half of 2008.

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Published by: ycharts on Nov 21, 2009
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Office of the State Comptroller 1
The global financial crisis was rooted in excessiverisk-taking, which exposed the financial industryto historic losses when underlying assumptionsproved faulty. As the crisis unfolded, it claimedthousands of jobs, saw the demise of storied firms,fundamentally transformed Wall Street, andprecipitated a global recession and a fiscal crisisfor New York State and New York City.With severe job losses in the securities industry,Wall Street’s multiplier impact—which hadenormous benefit to New York City’s economyduring the economic expansion—worked inreverse, leading to job losses in the rest of theCity’s economy. While the pace of Wall Street joblosses has slowed considerably, the industry is notyet adding jobs on a sustained basis.The national economy is slowly improving, butWall Street has recovered much faster than anyonehad envisioned. Profitability is on track to exceed2006 levels, which was a banner year for theindustry. Strong profits have been driven by lowinterest rates, which reduce the cost of doingbusiness.Compensation is also increasing faster thanexpected, leading to expectations of higherbonuses. The federal government, which spenttrillions of dollars to support the financial sector,has taken steps that may restrict cash bonuses anddefer compensation to future years in an effort toreduce excessive risk-taking and reward long-termperformance. While these initiatives may reducepersonal income tax collections in the short term,New York State and New York City could benefitfrom increased stability in the financial sector.Even in the wake of the crisis, Wall Street remainsthe economic engine of both New York State andNew York City. Although the industry’s prospectsare much brighter than one year ago, it continuesto face challenges as it adjusts to the postcrisisenvironment, and may still experience setbacks.
The Securities Industryin New York City
 
Thomas P. DiNapoli
Kenneth B. Bleiwas
 
New York State Comptroller Deputy ComptrollerReport 14-2010 November 2009Highlights
 
The broker/dealer operations of New York StockExchange member firms earned a record$35.7 billion in the first half of 2009—more thanone and a half times the previous annual peak.
 
Net revenue totaled $91.4 billion in the first half,compared to $35 billion in the first half of 2008.
 
The four largest investment firms headquarteredin New York City (for which there are data)earned $22.6 billion in the first nine months of 2009, compared to a loss of $40.3 billion in 2008.
 
Employment in the securities industry in NewYork City has declined by 28,300 jobs sinceemployment peaked in November 2007.
 
Job losses in the securities industry in New YorkCity are unlikely to exceed 35,000, a muchsmaller loss than previously forecast. (Theindustry added 3,600 jobs in September 2009.)
 
Even though the securities industry accounted forless than 5 percent of the jobs in New York Cityin 2008, the industry accounted for 24 percent of all of the wages paid in the City.
 
The nation’s six largest bank holding companiesset aside $112 billion for compensation in the firstnine months of 2009, and are on track to exceedlast year’s compensation level. Individual firmsmay approach or even exceed the 2007 level.
 
The bonus pool (including deferredcompensation) for the securities industry in NewYork City could be higher than last year based oncurrent compensation trends.
 
New York City tax collections from Wall Street–related activities declined by an estimated$1.9 billion, or 40 percent, in City Fiscal Year2009.
 
Wall Street accounted for 20 percent of NewYork State tax collections two years ago, but willaccount for about 15 percent of tax collections inthe current fiscal year.
 
 
2 Office of the State Comptroller
Financial Crisis Overview
The root cause of the current financial crisis wasexcessive risk-taking by the finance industry. Thecrisis was precipitated by a decline in U.S.housing prices that began in 2006. By the end of 2007, financial firms were reporting losses relatedto asset-backed securities, and as 2008 progressed,losses widened to other types of debt instruments,equity markets fell, and firms rushed to raisecapital in order to remain solvent.The crisis peaked in September 2008 whenLehman Brothers collapsed and credit marketsfroze. The International Monetary Fund hasestimated that top U.S. and European banks havelost more than $1 trillion on toxic assets and frombad loans since the start of 2007. The U.S.government responded—along with many othernations—with both fiscal and monetary policyinitiatives. Nearly $9 trillion has been committedworldwide to support the global financial system.In October 2008, Congress approved the$700 billion Troubled Asset Relief Program(TARP). Originally intended to allow thegovernment to remove toxic assets from bank balance sheets, TARP was instead used to injectcapital directly into the banks and to fund otherrescue initiatives, including bailout efforts forAIG, Chrysler, and General Motors.In October 2008, the U.S. Department of theTreasury required the nation’s nine largestfinancial institutions—Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs,JPMorgan Chase, Merrill Lynch, Morgan Stanley,State Street, and Wells Fargo—to accept$125 billion in TARP funds in exchange for seniorpreferred stock and warrants. Eventually, bothCitigroup and Bank of America requiredadditional TARP resources. The initiative wasthen expanded to smaller institutions. Ultimately,nearly 700 banks received funds.Beginning in June 2009, the U.S. Treasury beganto allow the large banks to repay their TARP funds(some smaller banks had already begunrepayment). Through mid-October 2009, a total of 41 banks (including Goldman Sachs, JPMorganChase, and Morgan Stanley) repaid nearly$72 billion. In addition, the Treasury earned nearly$12 billion from dividends on the preferred sharesit has held, and nearly $3 billion from warrantssold back when banks repaid their TARP funds.Since the Federal Reserve reduced interest rates toalmost zero between September 2007 andDecember 2008 in order to increase liquidity inthe financial system, it had to develop other toolsto support the system and to stimulate theeconomy.The Federal Reserve expanded existing lendingprograms and created new initiatives, many of which operated in conjunction with the Treasury.These efforts more than doubled the size of theFederal Reserve’s balance sheet, which rose from$926 billion in the first week of January 2008 to ahigh of $2.3 trillion in the last week of December2008 (see Figure 1). The balance sheet hasdeclined only slightly since then, and the FederalReserve is developing an exit strategy to withdrawliquidity from the financial system before it fuelsinflation or creates other imbalances.
Figure 1
Total Assets of the Federal Reserve
Sources: Federal Reserve; OSC analysis
 0  0  5 - 0 - 0  5  0  0  5 - 0 - 7  0  0  5 - 0  8 - 7  0  0  5 -- 0  7  0  0  6 - 0  3 - 9  0  0  6 - 0  7 - 9  0  0  6 -- 0  8  0  0  7 - 0 - 8  0  0  7 - 0  6 - 0  0  0  7 - 0 - 0  0  0  8 - 0 - 3  0  0  0  8 - 0  5 - 0  0  8 - 0  9 - 0  0  0  8 -- 3  0  0  9 - 0 - 0  0  9 - 0  8 -
7009001,1001,3001,5001,7001,9002,1002,300
Billionsof Dollars
 
Risk Premiums
More than one year after the collapse of LehmanBrothers, the worst of the crisis appears to be overand some aspects of the financial markets havealmost returned to precrisis levels. One notablearea of improvement is in the pricing of risk infinancial instruments.One common measure of risk is the differencebetween the interest rate on 3-month Treasury billsand the 3-month interbank lending rate, reflectedin the London Interbank Offered Rate (i.e., theLIBOR). As shown in Figure 2, this spread surgedto nearly 458 basis points in early October 2008 asthe crisis intensified, but the spread narrowed asthe U.S. and other nations worked to assist thefinancial sector. As the credit crunch eased andconfidence in the banking system grew, the spreaddropped to about 20 basis points in mid-September2009—a level last seen in 2004.
 
 
Office of the State Comptroller 3
Figure 2
Spread Between Interest Rate on 3-MonthTreasury Bills and LIBOR Rate
Sources: British Bankers' Association; U.S. Board of Governors of the Federal Reserve System;Moody's Economy.com; OSC analysis
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A u g 0  7  S  e  p 0  7  O c  t   0  7  3 D e  c  0  7  J   a n 0  8  5  e  b  0  8 A p 0  8 M a  y 0  8  J   un 0  8 A u g 0  8  S  e  p 0  8  3  O c  t   0  8 D e  c  0  8  6  J   a n 0  9  7  e  b  0  9  8 A p 0  9 M a  y 0  9  J   ul   0  9 A u g 0  9  S  e  p 0  9  N o v 0  9 
050100150200250300350400450500
BasisPoints
The premium spread between higher- and lower-rated corporate bonds has also narrowed. Duringthe crisis, concerns about credit quality caused thespread between Moody’s top-rated Aaa corporatebonds and lower-rated Baa bonds to rise, from0.77 percentage points on October 11, 2007, to3.5 percentage points on December 3, 2008 (seeFigure 3). By early November 2009, the spreadhad narrowed to 1.12 percentage points.
 
Figure 3
Interest Rate Spread Between CorporateAaa-Rated and Baa-Rated Bonds
Sources: Moody’s Investors Service; OSC analysis
 0  0  7 - 0 - 0  0  0  7 - 0 - 0  0  7 - 0 - 0  0  0  7 - 0  5 - 9  0  0  7 - 0  7 - 7  0  0  7 - 0  9 - 0  0  0  7 - 0 - 3  0  0  7 -- 0  0  8 - 0 - 0  0  0  8 - 0  3 - 0  0  8 - 0  5 - 0  9  0  0  8 - 0  6 - 7  0  0  8 - 0  8 - 5  0  0  8 - 0 - 0  3  0  0  8 -- 0  0  9 - 0 - 0  0  9 - 0  3 - 0  5  0  0  9 - 0 - 3  0  0  9 - 0  6 - 0  0  9 - 0  7 - 3  0  0  0  9 - 0  9 - 7  0  0  9 -- 0  5 
0.00.51.01.52.02.53.03.54.0
PercentagePointSpread
 The financial crisis also increased borrowing costsfor municipalities and limited the size of issuancesthat the market could absorb. Moody’s MunicipalBond Yield 20-Year Composite shows that inOctober and December of 2008, municipal bondyields rose above 6 percent (see Figure 4). Sincethen, conditions have improved, and the averageinterest rate was 4.8 percent in early November.The federal government established the BuildAmerica Bonds (BAB) program to reduceborrowing costs for states and localities. Althoughthe bonds are taxable, the Treasury reimbursesissuers for 35 percent of the interest payments. InOctober 2009, BABs accounted for 29 percent of municipal bond issuances.
Figure 4
Municipal Bond Average Yield:20-Year Composite
Sources: Moody’s Investors Service; OSC analysis
 6  J   a n 0  5  3 M a  0  5  3  J   un 0  5  5  S  e  p 0  5  8 D e  c  0  5 M a  0  6  5 M a  y 0  6  7 A u g 0  6  9  N o v 0  6  e  b  0  7  6 A p 0  7  9  J   ul   0  7  O c  t   0  7  3  J   a n 0  8  7 M a  0  8  9  J   un 0  8  S  e  p 0  8 D e  c  0  8  6  e  b  0  9 M a  y 0  9  3 A u g 0  9  5  N o v 0  9 
3.54.04.55.05.56.06.5
Percent
 
Access to Credit
Despite a Federal Reserve program that boughtcommercial paper to prop up the market, the levelof outstanding commercial paper fell by52 percent from its peak in July 2007 of $2.2 trillion to a low in July 2009 (see Figure 5).Although the economy is now improving,businesses are still finding it difficult to obtaincredit. The amount of commercial paperoutstanding started to increase beginning in July,but the level was far lower than in earlier periods,and in recent weeks the amount of commercialpaper outstanding has begun to contract.
Figure 5
Commercial Paper Outstanding
Source: Federal Reserve Board
 0  0  5 -- 5  0  0  5 - 0  5 - 0  0  0  5 - 0  8 - 3  0  0  5 -- 8  0  0  6 - 0 - 6  0  0  6 - 0  8 - 3  0  0  6 -- 0  0  0  7 - 0 - 8  0  0  7 - 0  8 - 5  0  0  7 -- 0  0  8 - 0 - 0  9  0  0  8 - 0  8 - 0  6  0  0  8 -- 0  3  0  0  9 - 0 - 0  0  0  9 - 0  7 - 9 
1.01.21.41.61.82.02.22.4
TrillionsofDollars
Note: Data have been seasonally adjusted.
 Consumers are still encountering difficulty inaccessing the credit markets. Banks have reducedtheir exposure by tightening lending standards andreducing available credit lines. Many consumershave cut back on borrowing in the wake of joblosses. From a peak in July 2008 to September2009, the level of outstanding consumerinstallment credit fell by $126 billion to$2.5 trillion (see Figure 6).

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