Festival of light brings sparkle to banks

Diwali, the festival of lights, is a wonderful time of the year in India where I have just been. Little clay pots with oil and wick, called diyas are lit at homes across the country. Parties are held and generous gifts exchanged. Diwali is a joyous time; the season of return and renewal; the festival of accounting when prayers are offered to Lakshmi, the deity of wealth. Already, prayers seem to have been answered rather early, at least for the world's banks.

Earnings from two of the major US banks have sparkled like Diwali fireworks! JP Morgan Chase and Goldman Sachs both made more than $3 billion in the quarter. Goldman's results were lower than the last quarter but still double against the same time last year. The money was made from the bank's trading and investments. In other words, Goldman Sachs took its own capital and turned itself into a money machine. Equities, derivatives, mortgage-backed securities; you name it, they traded and made money at it.

Profits

Even the dog of the banking sector, Citigroup, seems to have shed a few fleas for the quarter and eked out a small profit of $101 million, (barely the rounding error on the other banks results, but a profit nonetheless.) At the time of writing only Bank of America has actually reported a loss, mainly through its retail banking divisions.

Unfortunately unlike Rama, the King of Ayodhya who returned after 14 years in exile, the banks have returned to profitability in just about, oh, nine months. And unlike the celebrations of Lakshmi, they haven't done it on their own — they have been given taxpayer money to do it! And that is the mixed blessing of the banks' profits.

Good and evil

The fact the banks are making excellent money again is both good and evil for the financial system. We certainly need a strong banking system if the global economy is to get on its feet, no question about it. Strong banks make more loans which get the whole thing moving again. But with those profits comes the inevitable bonuses that will be paid. Goldman said 43 per cent of the banks costs — $16.7 billion — would go to compensation. At this rate the compensation pool will be a record $20 billion by year's end.

The grumblings from the critics have already begun. The argument is simple: If the taxpayer hadn't bailed out Wall Street, far from getting bonuses, bankers would have been thrown out of work, like office and factory workers! The banks should be grateful not greedy.

This argument is also circular. The banks shriek back: "You bailed us out because you need us." If the banks went bust more people would be out of a job.

There is truth to both arguments, which is why it is to be hoped common sense prevails.

Tune in to CNN International each evening at 1900 GMT to catch Richard's new show, ‘Quest Means Business'. For more information on Davos please visit www.cnn.com/davos

Tune in to CNN International each weekday at 2200 UAE time to catch Richard's show, Quest Means Business.