“Citigroup’s (NYSE:C) jump in second-quarter trading profits highlights the benefits of diversification for big banks — and how much they have to lose from the movement to resurrect the Glass-Steagall barriers between commercial and investment banking.
“Citigroup, perhaps more than any other bank, has been a product and a victim of the decision to remove those barriers, which originated with the Depression-era Glass-Steagall law. As the law was repealed in 1999, Citigroup ballooned into an unwieldy financial supermarket, shrinking only after the financial crisis forced it to take three government bailouts. Now the bank is much smaller, but it still relies on a complex mixture of banking and trading activities to drive profits.
“On Monday, Citigroup said its securities and banking unit helped its second-quarter profit exceed expectations and offset weak growth in its large and international consumer operations. Overall profit grew 42% from a year earlier, to $4.18 billion, or $1.34 a share. Excluding an accounting adjustment, Citigroup’s per-share profit was $1.25, seven cents better than consensus estimates of analysts polled by Bloomberg.
“Citigroup’s results mirrored a similar report Friday from JPMorgan Chase (JPM), which also relied on strong trading results to carry it through a weak quarter for traditional banking activities. Coming days after lawmakers introduced a bill that would effectively resurrect Glass-Steagall, both earnings reports show how crucial investment banking is to large banks’ business mix.”
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