Toy Chart of the Day: GS and MS Trading Revenues and Risk

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Strong earnings from Morgan Stanley today, with a top-line beat and lots of positive commentary on the call about converting their Mitsubishi preferred shares and gaining recognition in trading businesses, have MS up almost 10% so far today. Every story about MS earnings seems to be a story about how they're doing versus Goldman Sachs, and so we may as well just say now: pretty good.

How'd they do it? Two possibilities come to mind:

1. Improved client facility with speed dial.

2. Increased aggressiveness at Morgan Stanley while GS is reducing value-at-risk and complaining about how hard it is to predict political events.

We wanted to figure out which was more important. So we cooked up a toy chart showing the ratio of quarterly trading (FICC and equities) revenue to average daily VaR, arguably a rough measure of the trading performance of those businesses. And here it is.

We threw in total revenues to trading VaR just for fun. Some thoughts:

1. MS outperformed on this metric - made more money for its level of risk - in 2008, with competitive revenues on a much lower VaR, but that outperformance cratered during the crash and never came back, at least not in trading businesses.

2. But after this quarter it's pretty close again - MS made $4bn in trading businesses in 2Q 2011 on a $145mm VaR, versus $3.5bn and $101mm for GS - suggesting that MS's outperformance is driven not just by more aggressive risk-taking this quarter but also by market share gains and/or better risk-adjusted returns.

3. Goldman and Morgan Stanley made $390k and $310k, respectively, for every million dollars of VaR each calendar day last quarter - or $540k and $420k each trading day.

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TARP Charts!

The Federal Reserve has this new paper out about TARP that does a bit of highly suggestive eyebrow raising about some banks that shall remain nameless. They start from the awkward fact that TARP wanted everything in one bag but didn't want the bag to be heavy, or as they put it: The conflicted nature of the TARP objectives reflects the tension between different approaches to the financial crisis. While recapitalization was directed at returning banks to a position of financial stability, these banks were also expected to provide macro-stabilization by converting their new cash into risky loans. TARP was a use of public tax-payer funds and some public opinion argued that the funds should be used to make loans, so that the benefit of the funds would be passed through directly to consumers and businesses. So you might reasonably ask: were TARP funds locked in the vault to return the recipient banks to financial health, or blown on loans to risky ventures, or other? Well, here is Figure 1 (aggregate commercial and industrial loans from commercial banks in the U.S.): So ... not loaned then. But that's not important! The authors are actually looking not primarily at aggregate amounts of loans but at riskiness of loans and here's what they get: