Investment banks are back, baby! And you can thank the COVID-19 pandemic and the resulting economic instability for their resurrection.

After nearly a decade of apparent toil in the wilderness following the 2008 financial crisis that claimed the lives of two of their powerful brothers, Bear Stearns and Lehman Brothers, and a third, Merrill Lynch, its independence, the financial performance of the second quarter of the two remaining pure play investment banks, Goldman Sachs and Morgan Stanley, have proven that the traditional stronghold of investment banking – trading in stocks and bonds and underwriting stocks and bonds – is alive and well, thank you very much. Goldman’s subscription revenue increased 107% in the second quarter of 2020, compared to the second quarter of 2019. Trading revenue increased 93%. These are big numbers. (JPMorgan Chase’s investment bank also performed well in the second quarter, with second quarter revenue up 54% from the same quarter a year earlier.)

“JP Morgan also looks solid,” says Mike Mayo, the longtime Wall Street research analyst, now at Wells Fargo Securities. “But the pure plays are the best performing banks this year, Morgan Stanley and Goldman Sachs…. They are simply more in the right place at the right time. They do not have the income of traditional commercial banks as much as others. They are therefore less affected by credit losses and falling interest rates. It’s a double-barreled gun that targets the banking industry, and it’s the cost of credit and the pressure on margins, and they’re less exposed in those two areas.

And what is also clear is that the big universal banks – JPMorgan Chase, Bank of America and Citigroup – had a more difficult quarter than Goldman and Morgan Stanley due to the need to take huge loss reserves on loans to account for potential financial losses from loans and credit card balances that go unpaid due to the deteriorating economy. JPMorgan Chase, for its part, has taken nearly $ 20 billion in loan loss reserves since the start of 2020. Its $ 10.5 billion second-quarter allowance, announced on July 14, slashed profit by half year-on-year. “This is not a normal recession,” said the chief executive of the bank Jamie Dimon recently said explaining the provisions for loan losses. “The recession part of it all, you’re going to see it down the road. Goldman, meanwhile, with a loan portfolio of about $ 110 billion, added $ 1.6 billion to its loan loss reserves in the quarter.

There has been a bit of a holy war on Wall Street since the bloodshed of 2008 called into question the way Wall Street conducts its business and the form survivors should take. Lloyd Blankfein, The CEO of Goldman Sachs from 2006 to 2018, has long argued that the regulatory and economic changes plaguing Wall Street after the financial crisis were cyclical and not structural. He basically argued that once things were settled Goldman would be in a better position to compete by focusing on its traditional strengths of providing investment banking services – M&A advice, underwriting and trading – with a touch of wealth and asset management added. Goldman, he said, did not need to enter the world of commercial banking, with federally insured deposits, business and personal loans, mortgages, credit cards, cash management. , sensitivity to interest rates and the world of trillions of dollars. balance sheets.

Morgan Stanley, on the other hand, under James Gorman, its CEO, was less zealous about the “cyclical” versus “structural” debate. He quickly decided to buy Smith Barney’s brokerage business from Citigroup in order to manage his money and generate more stable fee income than the notoriously volatile world of M&A trading, underwriting, and advisory. . Gorman made a big bet on wealth management which paid off. Three years ago, Morgan Stanley’s market capitalization exceeded that of Goldman Sachs for the first time in about a decade. And it still is: Morgan Stanley stock is valued at around $ 82 billion; Goldman’s stock is valued at around $ 73 billion.