It's Time To Talk About That Other Thing That Destroyed Wall Street Earnings

All of the big American Wall Street banks have reported their fourth quarter earnings, and you can pretty much use one word to describe them - rotten.

Most of the talk has centered around a full-on route in trading revenue, especially in the bond, currency, and commodities markets. Citi's trading revenue was down 14% overall from the same time last year. JP Morgan's bond trading revenue fell 23% from the same time last year.

Even Goldman Sachs, the only bank to eek out an earnings beat, saw its bond trading revenue fall 29%. It was the talk of Goldman's conference call - the fact that there's a difference between good volatility in markets (just a touch) and bad volatility in markets (too much).

But while the focus on trading revenue makes for sexy headlines, it leaves out one big unsexy factor that decimated bank earnings. Yes, we're talking about legal costs.

Perhaps people are simply tired of talking about this factor since a lot of the transgressions banks are paying for date back to the financial crisis. Perhaps cynics are just tired of repeating the phrase, "cost of doing business."

Here's the scoreboard for you:

• Bank of America shelled out $393 million for legal expenses, down from $2.3 billion a year before. That said, in the third quarter the bank shelled out $5.6 billion for legal costs - so there's that.
• JP Morgan's legal expenses held steady for the fourth quarter of 2013 and 2014, roughly hovering around $1 billion.
• Goldman Sachs faired better, spending $161 million legal expenses in the fourth quarter of 2014, down from $561 million at the same time last year and $194 million the previous quarter.
• Citigroup's legal expenses increased from the same time last year from $1 billion to $3.5 billion. In the third quarter of 2014 the bank spent $1.3 billion on legal expenses.
• Finally Morgan Stanley's legal expenses aren't totally clear. We just know that the bank spent $284 million "for legacy residential mortgage related matters" and that "Non-compensation expenses of $2.8 billion decreased from $4.1 billion a year ago, primarily reflecting lower legal expenses."

It looks bad, sure, but we've seen worse.

The issue is that, seven years after the crisis, Wall Street is starting to settle into a new normal, and there is concern that this is what normal looks like now.

If these legal issues - some from the crisis, some not - are merely the "cost of doing business" then it's starting to look like business is costing too much. Two or three years ago it seemed clear that these fines would, sooner rather than later, become a thing of the past. A big Wall Street bank would announce a massive legal cost and that bank's stock wouldn't move an inch. Investors didn't really care.

But that kind of thinking is becoming increasingly problematic as it's clear that these expenses actually do matter, and this quarter is an excellent example of why. Combine a weak quarter in trading (or equity underwriting, or any other sector of the business) along with legal costs, and all of the sudden you have a nasty cocktail of big bank failure. With these legal costs as they are, it doesn't take much to tip the scales.

Trading issues happen, the market is cyclical and every trader will tell you that one minute you're killing it, and the next minute you're getting your face ripped off. That's natural. The unholy mess that those losses make when combined with legal expense, however, is not so natural.

The longer this goes on, the more people will catch on to that.