How Is The Whole "Don't Risk All Your Money Trading For Your Own Account" Thing Working Out For US Investment Banks?

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All the big banks have reported earnings so let's take a little stock of things, shall we? A thing I did midyear was look at the ratio of trading net revenues to VaR for GS and MS, to prove that MS was winning the trading or something. Let's expand that a bit. The result is, I think, an interesting chart:

The interpretation you could put on this is "this is how much money GS/MS/JPM/BAC made on an average trading day for every dollar of capital that they said they had at risk on that day." Technically, this is is a graph, quarterly from 1Q2006, of [Trading Net Revenue / (Average Daily VaR * Trading Days in Quarter)], for four banks. Go read caveats here.*

This is obviously a toy chart, and too aggregated/undersampled to tell you all you might want to know, but still kind of fun. I don't spend my days cursing VaR as an abomination upon the land, but it is fun to sometimes make fun of it as a quantitative measurement, and if you enjoy that you'll enjoy reminiscing about the fourth quarter of 2007, where, on average, every day at Morgan Stanley was a one-in-twenty down move and every day at Bank of America was a one-in-a-hundred disaster. What are the odds?

But the numbers are mostly positive, which makes sense, since you should make money in a risky business if you plan to stay in it (hint to those roughed up by MS FID comp today), and you can interpret their trend if you so choose. It seems to be mostly down from the '06 glory days. That's probably a bad thing for bank shareholders and stuff, but also - maybe more so - for regulators. Like, here is a business where you should make basically infinite money per dollar of VaR: buying and selling stocks on commission. Here is a business where you should make more like ($1) to $1 per dollar of VaR: principal risk-taking for your own account. As the Volcker Rule noise heats up, you might take a moment to ponder the fact that the big banks' trading revenues seem to be more and more at-risk - i.e. more and more tied to their using their own capital to support trading, and less and less connected to pure no-risk commission business. Like a lot of people, I've got no problem with that. Others do.

In any case, none of that applies to JPMorgan, who keep making more dollars per dollar of VaR. They can do no wrong. Huzzah.

* Data from Bloomberg and filings/announcements where Bloomberg was missing data. I have ignored the GS and MS calendar shift from a November to December FYE, just doing whatever Bloomberg does. Trading revenue is some plausible interpretation of filings meant to get at "flow" trading revenue in the investment bank and probably has comparability issues given different segmenting etc. VaR is reported aggregate VaR or "trading VaR." Note that BAC reports a 99% VaR; the rest use 95% confidence.

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