Laughing all the way: banks’ pandemic windfall

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Hello and welcome to the Intelligence on Economist Radio. I'm your host Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world. For years, Brazil had a policy forbidding contact with isolated indigenous groups in the Amazon. More and more, though, people are flouting that rule, egged on by a president who has no problem with miners and missionaries muscling in. And Graziano Messina has been on the wrong side of the law since he was 14. He's dashing, tends to charm the ladies. He's excellent at escape. And he's once again on the lam in Sardinia. Or maybe not. But first, Since the first days of the pandemic, there's been a disconnect between the pain on Main street and the profits on Wall Street.

Stocks rising yesterday with the NASDAQ closing at its highest level since late February. What do you think about this amazing rally?

I mean, 45% from the bottom for the S&P 500, we had this best week since the.

On the same day that employment numbers are horrific, this week that chasm seems to have widened a bit more. While most of the country was on lockdown, America's biggest investment banks such as Morgan Stanley were earning record profits.

The results we announced this morning build on a very strong relative performance of the first quarter. With a record breaking second quarter, revenues of 13.4 billion exceed our best quarter ever by 21%.

But not every kind of bank had something to celebrate as earnings were announced this week. And that gives a hint about how prepared the banking industry is for further calamity.

The biggest takeaway from banks earnings this week was that Wall street or the investment banks did extremely well. They made almost record profits.

Alice Fullwood is the Economist's U.S. finance correspondent.

@ the same time as Main street banks were suffering, they set aside a lot of provisions for expected loan losses. Thanks to the coronavirus pandemic so.

Let'S start with the investment banks then. Why have they made so much money at a time like.

This? There are basically two things that investment banks do. The first one is to help companies raise capital so they can help them issue bonds or issue equity. And that was something that a lot of companies were extremely keen to do in the second quarter of this year. You'll remember in March that the bond market shut down and companies were unable to access that. So when things reopened after there was some help from the Fed, companies rushed to issue as much debt and equity as they possibly could. At the same time, the other things that banks do is manage those markets so they trade securities that they've already issued. Their trading businesses tend to be extremely lucrative in times of high volatility. Volatility is good for trading desks because you tend to see a lot of client activity when things are volatile. And you also tend to see spreads widen. And spreads are an indication of how much money a bank makes on each trade. So they make more money per trade and they tend to do more trading as well. And so what you saw this time around was that trading revenues rose by about 70% year on year at places like Goldman Sachs and Morgan Stanley. So in both of their core businesses, investment banks did extremely well this.

Quarter. And what about retail banks, savings and loan kind of.

Banks? It's been a different story for regular lenders, the lenders to Main Street America. And that's because the way that they interact with the economy is by gathering up deposits from households and firms and making loans to small businesses and individuals. And what usually happens in a crisis is that when people are laid off or when firms revenues drop, they will stop paying back their loans. The unusual thing about this crisis is that that hasn't really happened yet. You know, even as unemployment claims have spiked, people have kept paying back their debts. JP Morgan revealed this week that of all of the households that asked for a deferral in their payments, half had actually kept making payments over the past three months. So what you've seen instead is lenders having to set aside these enormous provisions for lo expect to go bad. So in total, banks put aside about $35 billion in the second quarter, in addition to the 25 they set aside in the first quarter of this year. So they now have this mountain of cash or provisions, but they actually aren't seeing that many delinquencies.

Yet. So essentially, investment banks made a bunch of money by skimming off the top of loads of trades as companies piled up cash piles so as to feel safer. And the banks themselves piled up the resources to deal with loan losses that haven't happened yet. I mean, do you see that dynamic.

Continu. So it seems very unlikely that investment banks will be able to repeat their second quarter performance again. Jamie Dimon, the boss of JPMorgan Chase, said on their earnings call that analysts should cut estimates for trading revenues in half for next quarter. And you've already seen trading volumes in June and early July go back to more normal levels. At the same time, a lot of firms have already issued all the debt and equity that they need in terms of the outlook for Main street lenders, whether they'll have to keep provisioning for loan losses or. One of the more peculiar things about this recession is that thanks to the sort of enormous government stimulus, thanks to meeting unemployment benefits and lending to small businesses and the Federal Reserve backstopping the corporate loan market, you really haven't seen defaults yet in any meaningful way. Banks now probably have around $60 billion set aside to deal with losses in the future. And whether they need even more than that is an extremely difficult question to answer. And you heard a lot of bank bosses grappling with this uncertainty on the calls. Mike Corbat, the CEO of Citibank, said it.

Best. We are in a completely unpredictable.

Environment for which there are no models.

No cycles to point.

To. But that is sort of the next phase of this crisis is that the investment banks won't make these bumper profits. You might see real loan losses coming through. It's sort of like the other shoe is about to.

Drop. So essentially, all of the dynamics that you describe so far have been in aid of preparing for a tidal wave that has essentially not hit yet. Do think that those preparations are enough? Do you think that there is still a risk of the bottom falling out, of banks going bust, of the sort of things we saw in 2007?

8. It's almost impossible to say whether the provisions will be enough because it's all based on the path of the virus and then how the economy responds in reaction to the virus, and also whether government stimulus can continue to be effective in helping people and firms stay afloat during this crisis. What I think that we can say is that it's extremely unlikely that this could develop to a sort of sufficiently bad situation that the banks would be at risk of going bust or even going bust like they did in 2007, 2008. And the reason for that is, firstly, that you would have to see them making much larger provisions than they did in this quarter for a lot of banks to make losses. And the second reason is that regulators have worked extremely hard to help help insulate the banking system, with the result that banks now have a sort of $1.2 trillion cushion of capital to fall back on. So knowing whether banks will make profits in Q3 and Q4, whether their provisions are enough is kind of an impossible question. But thinking that the banks will survive feels very.

Likely. But in the meantime, we see this real disconnect between the investment banks and the Main street lenders and the economy at large in that they're making big amounts of money. There is this disconnect between Wall street and Main.

Street. There is, and it is pretty galling. You saw in Goldman Sachs earnings earlier this week that they had increased pay by 38% year over year, which, as there are almost 80 million unemployed people, feels difficult to swallow. I guess the point I would make, though, is that the payday for investment banks is probably behind us. And at the same time, the investment banks were the heart of the crisis, the cause of the crisis last time. At least this time they are not making things worse. As for Main street lenders, you know, it's very typical that they will have to take losses during a crisis and that they are sort of ready for that. So even though it's sort of galling that Wall street is doing well while Main street is doing poorly, it's better than the alternative, which is that Wall street is causing chaos and Main street is going.

Bust. Alice, thank you very much for joining.

Us. Thank you.

Jason. To get more of these stories behind the Numbers, subscribe to the Economist. To find the best introductory offer wherever you are, just go to economist.com intelligenceoffer. Deep in the Amazon rainforest are uncontacted tribes who live untouched by modern society. But their isolation is a fragile thing. In the 1970s and 80s, development projects in Brazil encroached on their lands. Vast numbers of tribespeople died of diseases such as measles and flu. In response, the country adopted a no contact policy. Approaches to isolated peoples should only happen to prevent medical disasters or other crises, such as war between tribes. But some missionaries, miners and developers are ignoring the no contact policy. And they've been emboldened by Brazil's President, Jair.

Bolsonaro. Well, during his 2018 campaign, Bolsonaro complained that a group that makes up less than 1% of the population has 14% of Brazil's territory designated as indigenous.

Reserves. Sarah Maslin is the Economist's Brazil correspondent and is based in Sao Paulo.

He has said that indigenous groups shouldn't be living isolated like animals in zoos, and that indigenous people would be better off if they were integrated into modern Brazilian society. He's also really keen to develop the Amazon rainforest with agriculture and mining, including on indigenous land. So officially, the no contact policy is still in place, but in practice, there's a lot of concern that it's being.

Dismantled. And what are the issues surrounding contacting these isolated.

Tribes? Well, the reason that the no contact policy was adopted in the first place was because throughout the history of the Americas, contact with indigenous groups has been devastating. Isolation protects them from disease, which is really important right now because we're in the middle of a pandemic for which there's no vaccine. And indigenous people living in the middle of the rainforest have even fewer immune defenses than the rest of us. There's also the issue of choice and self determination. A lot of these isolated groups actually had contact at some point in the past. And their experiences were really traumatic, like being enslaved by rubber tappers. In the early 1900s. They fled into the forest to try to escape such treatment, and subsequent generations have decided to keep living that.

Way. But some people are ignoring the no contact policy and trying to get in touch with these isolated.

Peoples. There's been resistance to the no contact policy ever since it was implemented in the late 1980s, mostly from people who want to develop the Amazon for farming or mining. There's also been resistance from missionaries who believe that indigenous people should have a chance to get to know Jesus Christ and in some cases, have ignored the rules to try to find them and convert them. Late last year, when I was in the Amazon, I ended up in a tiny border town called Atalaya do Norchi, on the north end of an indigenous reserve called the Valle do Jabari. This territory is as big as Austria and home to nearly two dozen ethnic groups, including at least eight isolated tribes. Indigenous people who live in the villages often travel to the town from time to time for supplies and to meet with each other. When I was there, some of the leaders were really concerned about an American mission. Who they said was flying a seaplane into the rainforest to search for isolated tribes. In recent months, there's been even more concern about such missionaries because we're in the middle of this pandemic, and people in several villages in the Valle de Javarie reserve have already gotten.

Sick. But from the missionaries point of view, surely they realize that there are trade offs, that there are risks of making contact as.

Well. When I spoke to the American missionary, he Denied trying to reach isolated tribes. He says the times he's gone on the airplane, he was going to villages that are already in touch with outer society. And he also said the work of missionaries is essential to these indigenous groups that really don't get that much help from the government. Most missionaries I spoke to say that the no contact policy though, is wrong. In general, the missionaries perspective is that indigenous people have a right to make contact with whomever they please, and that keeping them in the forest is denying them modern education, health care and economic opportunities, and of course.

Religion. But it's not just missionaries who are willing to try to make contact with these groups.

Right? Well, apart from the missionaries, the biggest concern for isolated tribes in recent decades has been an invasion of their lands by farmers and loggers and miners. The corollary to the no contact policy has always been that the government needs to protect the lands of indigenous people and give them the space to continue living the way they do. But the government in Brazil and in most countries that have adopted a no contact policy has been really bad at enforcing this. They haven't given their indigenous agencies the teeth or the resources that are needed to keep illegal invaders off the lands. And as a result, you see, for example, in the Yanomami territory up near the border with Venezuela, more than 20,000 illegal gold miners continuing to go in and out of the territory, even during the.

Pandemic. And what role does Mr. Bolsonaro play in.

This? Bolsonaro has proposed legalizing mining on indigenous reserves, and he thinks the best thing for indigenous groups is to invite economic activity so they start living like the rest of us. He also put an ex missionary in charge of the unit of the indigenous agency that's responsible for isolated.

Tribes. Is there any reason to believe that the contact comes with benefits such as better healthcare.

Say? The question of what's best for uncontacted tribes is a really difficult one, partly because they're deep in the forest and can't speak for themselves. Aside from the missionaries and the miners, two American anthropologists caused a big stir in 2015 by writing an article in Science magazine arguing for what they called controlled contact. They said governments should admit they've failed at protecting the land of indigenous tribes and instead organize responsible contact missions with big medical teams and long term follow up to avoid the catastrophic results of past contact. It's also worth mentioning that among indigenous people who are already in contact in Brazil, some of them think they've benefited from contact and from missionary presence, both for religious reasons and practical ones like better Access to healthcare and.

Education. So what do you think the long term picture looks like then in terms of this encroachment from business, encroachment from missionaries, Sort of a mishmash of advice as to limited contact to controlled contact. Where will this all end up in the long.

Run? Well, even some of the staunchest advocates for the no contact policy are starting to admit that in the long term it might not last. That economic activities are encroaching on the lands of indigenous people more and more. And sooner or later these isolated groups, of which their probably only about 100 left in the world, will come into contact with society. Even before Bolsonaro, governments were unable or unwilling to protect indigenous lands. But I think it's really important to emphasize that contact would be a terrible idea right now. First, because we're in the middle of a pandemic and there's no way to do controlled contact that would prevent indigenous people from getting sick. Second of all, I have little faith that Bolsonaro's government would be able to make contact in a responsible way and wouldn't be influenced by religious and economic groups interested in indigenous people and their land. So I think the priority should be protecting these groups by keeping as far away as.

Possible. Sarah, thanks very much for joining.

Us. Thank you.

Jason. Seven years ago, Italian police on the island of Sardinia nabbed a notorious criminal. Officers said he was at the center of an organization dedicated to extortion and trafficking in drugs and weapons. But this month, before he could be locked away for a 30 year sentence, he.

Vanished. The island is being turned upside down in the search for a 78 year old.

Man. John Hooper is the Economist's Italy.

Correspondent. Graziano Messina, who is the most notorious bandit on Sardinia, has absconded rather than serve out the rest of a 30 year sentence for drug offences. And the police, the carabinieri, the revenue guard are all looking for this.

Man. So who is Mr. Messina? What has he definitely.

Done? He has definitely done many things during a long criminal existence that began when he was 14 years old. That was when he was charged with illegal possession of a firearm. Essentially, Graziano Messina was the most famous bandit of the so called Anonyma Sarda, a name really given by the media to a trend among the criminals of Sardinia for kidnapping.

People. And why did Mr. Messina become the most famous one of that.

Gang? Messina stood out as somebody with unusual charisma. He was very handsome as a young man. Those who've come into contact with him have said that he is both charming and intelligent and among Those who have come into contact with him, I ought to mention is said, many ladies with whom he's had affairs visiting them disguise. Such is the legend that surrounds Grazianedo, as he's half affectionately known, that he's been the subject of books, of films and so on. He spent a long time in prison, but he's also spent a long time out of prison, you might say, because he has a terrific talent for escaping and absconding. He has even escaped from a top security prison during his.

Career. So how did he get away this.

Time? In essence, he just didn't turn up. He had been let out of prison on a technicality after first being convicted of conspiracy to traffic narcotics, and he was subject to having to sign in with the police every day. And what happened was that he just didn't appear. And when the Carabinieri, Italy's semi militarized police, went to the home of his sister, she said that she'd seen him earlier in the day, but she'd had no idea where he was. And he got rather similar replies from other people in his hometown whom they spoke to, who were widely suspected of not being too keen to remember exactly if they had seen him or.

Not. So, any leads as to where he might.

Be? There are two theories about what's happened to Messina. One is that he has escaped to Corsica in France, the neighboring Mediterranean island, and in that case he could well be tracked down. Another theory, though, is that he might have escaped to Tunisia and in that case he might never be got back because Tunisia does not have an extradition treaty with Italy. All of that said, the most likely is that he's hiding out somewhere in Sardinia where he has friends and possibly old girlfriends, because apparently the Italian police have been visiting the houses of some now rather elderly ladies in their search for his.

Accomplices. John, thanks very much for your.

Time. My.

Pleasure. That's all for this episode of the Intelligence. If you like us, give us a rating on Apple Podcasts and see you back here on.