Wall Street

The Return of Irrational Exuberance

wall street leonardo di caprio source intertopics
Wall Street is back -- and so too are the risks of the next financial crisis. A scene from the movie "The Wolf of Wall Street'' starring Leonardo di Caprio.
  • Why it matters

    Why it matters

    Jamie Dimon, chief executive of U.S. banking giant JP Morgan, is confident for the future, reflecting the general comeback on Wall Street. This is in sharp contrast to the situation in the European banking sector.

  • Facts

    Facts

    • The five biggest U.S. banks had a combined share of 59 percent in global business with large corporate customers last year, up from 48 percent in 2009.
    • U.S. banks have two significant advantages over their European counterparts: a huge domestic market and the amount of capital that the U.S. government pumped into banks after the financial crisis.
    • Meanwhile, Deutsche Bank, the largest bank in Germany, has abandoned its goal of becoming one of the top global players in investment banking.
  • Audio

    Audio

  • Pdf

The head of JP Morgan speaks quickly; his thoughts seem to bubble out of him. Only occasionally does Jamie Dimon stop, correct himself and then continue, and if something is particularly important to him, he’ll shout: “Write that down!”

The 59-year-old survived the financial crisis and then cancer of the larynx. Mr. Dimon has now been in his post for almost a decade, longer than any head of a major U.S. bank.

Mr. Dimon is at peace with himself, and shows no trace of self-doubt seven years after the biggest banking crash since the Great Depression nearly brought global markets to a standstill.

What about the billions in fines that JP Morgan had to pay? Yes, certainly, mistakes were made, he says, but now Mr. Dimon prefers to look forward. What about the enormous size of his bank? Mr. Dimon does not believe this is a risk to financial stability or the taxpayer, but cautions it “benefits clients.”

While Mr. Dimon sits in New York and ponders how he can make his gigantic bank even bigger, about 6,200 kilometers (3,844 miles) to the east, a man with sad eyes is having to announce the partial surrender of Germany’s most powerful bank.

The message that John Cryan, the new head of Deutsche Bank, had to deliver last week was as gloomy as his facial expression: Thousands of jobs will go and the bank is going to withdraw from 10 countries. Perhaps most importantly, Mr. Cryan is breaking with his predecessors’ legacy once and for all.

Deutsche Bank has abandoned its vision of joining the big league of global investment banking, a blow for its German customers.

“We want to take fewer risks,” said Mr. Cryan, who replaced the hapless Anshu Jain at the helm of the bank in July. Mr. Jain was keen to get Deutsche Bank into the elite club of five to six major global banks that will control global finance in the future.

Mr. Jain wanted to be on an equal footing with the Jamie Dimons of this world. But he realized too late that the increasingly stringent requirements imposed by regulators had changed the rules of the once-so-lucrative investment banking business with bonds, derivatives and foreign exchange forever. The gigantic trading machine that Mr. Jain had built ground to a halt, yields dwindled, the capital base remained thin.

Now it has been left to Mr. Cryan to clean up the mess — including the billions of euros in fines for the various criminal activity committed by Deutsche Bank employees during Mr. Jain’s tenure, which has slowed the German bank’s post-crisis recovery.

It would be difficult to find two banking chiefs more dissimilar than Jamie Dimon and John Cryan. Just as Mr. Dimon’s vigor embodies the comeback of Wall Street, Mr. Cryan’s glumness stands for the misery of Europe’s financial sector.

Mr. Dimon is a dazzling example of Wall Street’s new-found confidence. The short street on the southern edge of Manhattan is the best-known symbol of the U.S. financial sector. Despite thousands of new regulations, billions in fines and heavy scrutiny from Washington, Wall Street banks are again bursting with strength. Profits are pouring in, even if they sometimes arrive via different channels than before: Where banks have been restrained by newly empowered regulators, asset managers, hedge funds and investment companies are stepping in to take up the slack – and make a lot of money.

Hedge fund managers can earn billions in their best years, eclipsing even Mr. Dimon’s $20 million pay packet last year. U.S. investors set the agenda for capital markets worldwide and determine the fate of nations. And the Fed in Washington is not just the central bank of the United States, but de facto, of the whole world.

In the United States of all countries, where the global financial crisis began with the collapse of Lehman Brothers in 2008, the crisis appears to be nothing more than a fading nightmare seven years later. This latest form of financial Alzheimer’s carries new risks. The seeds of the next crash are already sprouting on Wall Street. But no one is concerned at the moment; most want to celebrate the comeback.

In the Old World, there was a time when not just Deutsche Bank but a whole series of banks stepped up to challenge the wizards of Wall Street in investment banking. Now Deutsche Bank and Swiss bank Credit Suisse are the last two to abandon these ambitions.

Switzerland’s UBS and British banks Barclays and Royal Bank of Scotland already scaled back their investment banking activities years ago. “Europe’s banks simply aren’t strong enough to offer everything for everyone in investment banking; they need to develop new business models that are a lot more streamlined,” a board member of one large German bank says soberly.

This new sobriety will no doubt please European regulators, as the risks to financial stability should decline in line with balance sheets. Yet Europe’s banks are troubled and feel they are at a disadvantage with their rivals on Wall Street.

Want to keep reading?

Subscribe now or log in to read our coverage of Europe’s leading economy.