A memo from Bank of America CEO Brian Moynihan (NYSE: BAC) says that the financial firm will cut 3,500 jobs this quarter. Further restructuring could push that number as high as 10,000. Analysts have forecast that the bank industry will have to restructure again, though perhaps not as radically as in 2008. Balance sheets are still weak and earnings have been hurt by the loss of proprietary trading operations and the slow economy.
The fortunes of the banking sector were good just a year ago. Several large banks and investment houses posted near-record earnings in 2010. That was immediately after their unprecedented losses in 2008 and 2009. Bank proprietary trading and a rapid increase in corporate finance and M&A activity drove earnings higher.
Analysts have become concerned that banks could face the same kind of breakdown that they did in late 2008. That is because the assets they hold could be devalued by ongoing problems in the mortgage market and the possible collapse of the banking industry in Europe. Financial firms in France are at particular risk, and there are rumors that Credit Agricole and BNP Paribas could suffer huge losses due to investments in the sovereign debt in weak European nations. The global credit system is tied together closely enough that a bank failure in Europe would severely damage the financial prospects of banks in the U.S.
Whatever the cause, banks will start to lay off workers as predictions of earnings collapses become true. Banks perfected the art of layoffs three years ago, and that will come in handy throughout 2011 and 2012. Some estimates put the possible job cuts on Wall St. as high as 50,000.
The U.S. economy produces 100,000 jobs a month, based on those added in June and July. Jobs cuts in the public sector will weigh on unemployment. It will not take trouble in several industries to push the jobless rate up again after several months of stability, albeit at levels well above 9%.
The most recent financial crisis shook American financial firms to their foundations. It seems that is about to happen again. Even if the situation is not as bad as three years ago, broad job cuts are already inevitable.
Douglas A. McIntyre