Investment banking profits are not that outrageous

An efficient market is one in which middlemen are non-existent or have wafer-thin margins. So, this sounds right:
Surely, one measure of that efficiency is how little is skimmed off by the financial middlemen. So the next time someone tells you that it's no concern of yours if Wall Street traders are earning a king's ransom, remind him of the story of Goldman and Morgan and the financial wizards who thought they could spin capital out of straw
Newspapers would rather print fables about kingdoms and traders than actual numbers. But the numbers are not quite so damning. Rental car companies have a net profit margin of 6.7%. Architecture firms make 7.2% and so on for pretty much every industry. They're all in the 7% range. Investment bankers? They pull in 10.4% : 50% higher than "normal", but not outrageous either.

Gross profit in investment banking is an eye-popping 99.83% but that's because interest payments -- a normal cost of business in banking -- is not factored in. Once interest payments are factored in, gross profit is about 32%, which is on par with other professional services. Even payment to top management (1.5%) is not outrageous.

No comments:

Post a Comment