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Hangovers are a bitch. That hazy fog of what the hell happened last night, eventually must give way to the harsh light of day. Sooner or later the kegger runs dry.


New Normal on Wall Street: Smaller and Restrained
by Peter Eavis and Susanne Craig, dealbook.nytimes -- Jan 19, 2012,

[...]
Instead, Goldman Sachs’s earnings fell 67 percent last year; Bank of America’s investment banking operation, which includes Merrill Lynch, suffered a 53 percent decline in net income; and Morgan Stanley’s earnings were down by 42 percent.

Some of the forces that weighed on earnings last year -- like Europe’s government debt crisis and a sluggish United States economy -- could go away. Yet Wall Street still faces permanent pressures on profitability, particularly stricter regulations aimed at making the financial system safer. For instance, Wall Street firms cannot borrow such large amounts of money and make bets with it. With much less of this kind of leverage, the game is changed -- perhaps forever.
[...]

At Goldman Sachs, some young analysts -- a group that could earn year-end cash bonuses of up to $80,000 in better years -- were given as little as $20,000 this year, according to one person with knowledge of this year’s numbers.
[...]


We can only hope, these new capital borrowing requirements keep the "Too big to Fail" speculation in check.  So far so good.  Finally, they need to have something of real worth backing up their daily bets -- not just more virtually contrived paper.



[Continuing ...]

Wall Street firms operate under a tougher regulatory environment than existed in 2008. One of regulators’ first responses to the crisis was to make banks raise extra capital, to increase their buffer against losses, and they were told to use less short-term borrowed money to finance their businesses, which made them less vulnerable to runs. At the end of its 2007 fiscal year, Morgan Stanley’s $1.05 trillion of assets was supported by only $30 billion of equity. At the end of 2011, its equity was up to $60.5 billion and its assets were down to around $750 billion.

These adjustments effectively make it impossible to get back to the returns on equity achieved in the glory days. With double the equity, Morgan Stanley would now need to double profits, from a smaller pool of assets, to get back to its mid-2000s returns.


Such is what the harsh Monday morning light of day, is like.

Sooner or later, the adult-child thrill seekers must settle down, and try to make due with simple arithmetic growth rates. Those get-rich dreams of exponential growth really only exist in petri dishes and day-trading derivative bubbles.  And experience shows those both run out resources, eventually.

Market bubbles, all have one thing in common:  sooner or later they will all POP.

Sooner or later the heydays of wild profits, will crash back down to more stable realistic, sustainable growth rates.  Physics and common sense kind of demand it.

Sooner or later that Fraternity kegger will run dry ... and the Hangovers they leave behind can be a royal bitch.  Just ask the Wall Street newbies ... only a $20K bonus this year ... the poor babies.  

What will they do?  

Maybe, grow up?  

Maybe, try to "build something" -- instead of just "leverage" other people's stuff?

What a dilemma ... it's enough to drive a One-percenter to drink ...



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