What are the major Wall Street firms doing in Q2? Selling stocks, buying bonds, and buying cash

As early as March this year, the market briefly paid attention to the fate of the supplementary liquidity ratio one year after the new crown virus pandemic, but it did not cause market volatility and was quickly forgotten by most people, except for Wall Street.

Analysts said that with increasing uncertainty about the outlook for inflation and interest rates, how Wall Street banks manage the unprecedented surplus of cash on their balance sheets will be critical to distinguishing winners from losers in the next few quarters.

JPMorgan Chase Crazy Tuning Cash

The first is JPMorgan Chase, which claims to hoard more than US$500 billion in cash. Just last week, during the JPMorgan Chase’s earnings conference call, its CEO Jamie Dimon stated that he would continue to hoard cash instead of investing in securities, including U.S. Treasuries and mortgage-backed bonds, although both provide more than cash savings. More benefits.

JPMorgan Chase’s latest quarterly financial data shows that its average cash balance at the central bank and other banks increased by 89.6 billion U.S. dollars, while investment securities only increased by 2.6 billion U.S. dollars. For a bank that collects net interest income, this is hardly the best allocation: the bank's cash income is 0.06%, while its securities income is 1.31%.

There are many reasons behind the hoarding of cash. Jeremy Barnum, chief financial officer of JPMorgan Chase, told analysts that once unusually strong economic growth starts, pushing up inflation and interest rates, JPMorgan Chase is waiting for the opportunity to buy securities with higher yields. Given that bond yields continue to plummet (and prices soar), so far this has proven to be a painful decision.

Last month, Jamie Dimon said at a meeting, “JPMorgan Chase’s decision to reserve cash is entirely discretionary, and one day you will find out whether our decision is correct.”

Goldman Sachs sells stocks, Bank of America buys bonds

Goldman Sachs, another Wall Street investment bank, sold up to US$5.5 billion in equity assets (excluding a modest acquisition of US$1.5 billion) in the second quarter, accounting for more than a quarter of its entire investment portfolio.

Bank of America's operational thinking in the second quarter was different from that of JPMorgan Chase and Goldman Sachs. The bank reduced its cash by $31 billion and increased its holdings of securities by $107.3 billion. The bank said, "We have created an increase of $80 billion in deposits and we must make it work."

Bank of America CEO Brian Moynihan told analysts, "We are not placing a bet at the right time."

Analysts have pressured bank executives on their cash and securities portfolios because of how important proper capital allocation is to profits. But banks often hedge their positions with derivatives, which makes analysis more difficult.

Wall Street is not short of money

The cash generated by the US government's stimulus plan and the Federal Reserve's quantitative easing continues to flow into the financial system, suppressing social demand for bank loans. From an industry perspective, the demand for bank loans has remained unchanged since the global financial crisis 13 years ago.

Since the Fed's June meeting on interest rates, Wall Street has emphasized the need to balance the ratio of cash and securities investment before the Fed raises interest rates. Obviously, some investment banks have no investment at all, such as JPMorgan Chase. Goldman Sachs quietly liquidated a quarter of its equity investment, and it was also abundant in cash.

The analysis believes that banks' hoarding of cash and cash equivalents may also be based on other considerations, including ensuring the liquidity of customers who withdraw deposits and preventing the impact of the decline in the value of purchased securities on regulatory capital.

Looking at the second-quarter financial report of the major Wall Street banks, except for JPMorgan Chase, the reserve balances of other banks are declining, and the reserve balance of Bank of America has fallen the most, because the bank has allocated 60 billion US dollars in reserves and another 20 billion US dollars in deposits. Used to purchase U.S. Treasury bonds and mortgage securities. At the same time, deposit growth slowed to the slowest pace during the new coronavirus pandemic. Finally, bank capital growth also slowed sharply, as banks began to return earnings to shareholders through increased dividends and stock repurchases.

From the current point of view, JPMorgan Chase's early cash hoarding behavior has already lost the market's rise and brought huge gains. Goldman Sachs selling stocks also seems to have missed some of the market's gains. Perhaps, only when the Fed finally raises interest rates and shrinks its balance sheet, the market will know who made the right decision.