The world’s largest financial firms were supposed to recover after the credit crisis and the unprecedented support they received from the world’s largest governments. But things have not turned out so well if recent job cuts are any indication. UBS and Credit Suisse are laying off 5,000 and 2,000 workers, respectively, while HSBC is close to a decision to cut more than 10,000 jobs globally, Sky News reported. No amount of TARP funds or other positive news have been able to brighten an industry that is on the way back to purgatory.
It did not have to be this way. Banks made several critical mistakes as they emerged from the awful period which began with the bankruptcies of Lehman Bros and Bear Stearns and seemed to end as earnings recovered in 2010.
The first mistakes banks made is that they did not cleanse their balance sheets enough of mortgage-related securities and credit loans that they had taken on in the first half of the last decade. Institutions like Bank of America (NYSE: BAC) continued to take charges for mortgages that have lost much of their value. Money center banks have been sued and are pressured by government authorities to make good on mortgage-backed securities they sold to institutional investors without warning they might be highly risky instruments. It would have been painful to make admissions of their mistakes a year ago, but the silence of these banks will become expensive as legal actions against them grow.
It may be a cruel observation, but banks did not adequately cut costs in 2009. Managements assumed that a recovery would be swift and nearly permanent, and that investment bank and trading results would buoy earnings. That only worked until the Dodd-Frank provisions cut into those activities and M&A and underwriting opportunities slowed because the overall economic recovery turned out to be less than robust.
Many analysts who follow banks have voiced concerns that the largest firms in the industry did not act on what they must have known. The recovery was spotty as far as their results showed. The boards and executives at companies like UBS and Credit Suisse were not naive. The financial world had not recovered enough so that claims of a bright future were reasonable. Now the industry will pay for that, and worse, so will its employees.
Douglas A. McIntyre