Barclays (NYSE:BCS) is expected to announce a plan to layoff approximately 10% of its 23,000 investment banking employees early in 2013. Although the bank has not given any official details, it is generally believed that the job cuts will happen mostly in Asia and Europe. Barclays is going through a massive overhaul following the departure of its controversial chief Bob Diamond and Chairman Marcus Agius after a series of scandals, most notably the Libor manipulation. Barclays was fined £290 million ($469 million) over the Libor case. UBS just admitted to committing fraud and settled for a $1.5 billion fine. The Royal Bank of Scotland (NYSE:RBS) is likely to settle this soon.
Besides Barclays, every other major bank has been going through an "overhaul" which includes layoffs. So far, since the end of 2009, HSBC (HBC) and the Bank of America (NYSE:BAC), two of the largest banks of their respective continents, have announced the biggest job cuts of 30,000 each. HSBC recently reached a record $1.92 billion settlement with U.S. regulators over money laundering and operating in violation of U.S sanctions against Burma, Cuba, Iran, Libya and Sudan.
Barclays has been penalized three times since 2009 (Aug-2010, Jun-2012, Nov-2012) for a total of $1.218 billion. The entire financial sector has been hit by falling margins thanks to globally low interest rates, and with it, shrinking banking activity. With the mess in the U.S., the slowdown in China and the debt crisis in Europe, banks have had to deal with rising governmental penalties as politicians the world over see an opportunity to look tough on corruption, as well as litigation costs from rightfully angry consumers.
Politically, no real lasting pressure will be placed on these major banks, as they hold the entire financial and political system hostage. The problem of too big to fail is actually one of too big to jail as the confidence in the banking system's invulnerability is paramount in a fractional reserve system. Without confidence the system collapses. This is why banks like Barclay's and HSBC will grudgingly pay a fine without admitting any wrong doing. And once the fine has been settled, the stock and the company are free of the overhang. In the end, the fines will be paid by the central bank of the country of the bank's origin.
Since the beginning of 2011, about 160,000 job cuts in this sector have been announced and the process is not yet complete. Since 2009, 'net' job losses from 29 leading banks have reached 83,700. The staff operating on the fixed-income side of the industry has been mostly spared and it has been the equity side, particularly the investment bankers, that has taken the brunt of the damage. Moreover, redundancies have been far more severe in Europe than in the United States or Asia. The fiscal cliff is approaching quickly and if the politicians fail to agree on a deal then the tax increases and cuts in government spending will make the lives of U.S. bankers even more difficult.
While shares of most of these banks have been soaring, the industry has been shrinking -- the ratio of a job cut to a new hire is approximately 2:1, and its employees have little to cheer about. The announced job cuts, for example HSBC's plan to reduce payroll by 30,000 by 2013, doesn't include the job cuts resulting from the disposal of a business unit. With industry-wide job cuts, there is very little chance for employees to find a similar job at another bank. Remember, the stocks are recovering now that most of the job cuts have been announced as well as a number of the lawsuits and politically-motivated investigations have been completed. The bad news is mostly behind the banks; at least that is what the market is pricing in right now.
For that reason, the major banks have been great trades this year. But fundamentally they are still in very serious trouble, with balance sheets (and off-balance sheet books) clogged with trillions in worthless derivatives. The issue is the murkiness of their accounting balance sheets where non-marketable assets are still being held at full value even though the latest foreclosure rates are rising. According to the American University School of Communication and their calculations, the 'troubled asset ratio (T.A.R.)' national average continues to drop (11.4% in the 3rd quarter). Of the major banks among them-- Bank of America, for example, is still at 22.8%-- and that number rose in the 3rd quarter for the first time in 3 years. But, those calculations include the very numbers that are the hardest to value.
Between these things and the fact that most of the major banks' earnings this year have come from loan loss provisions - more than 50% of Citigroup's (NYSE:C) earnings in the third quarter was from a record loan loss release. It is extremely difficult to figure out what these banks should be valued at, because their balance sheets have rapidly become simply an accounting shell game.
This is the reason why The Fed announced both QE3 and QE4. In QE3, The Fed promised to buy up $40 billion per month in mortgage-backed securities from the banks to help clear their books. With QE4, the Fed will now be monetizing $45 billion in U.S. Treasury bonds every month to continue replacing admittedly worthless assets with Tier 1 assets. None of this would be necessary if the banks were fundamentally strong and it won't make them any stronger if the Fed's balance sheet, the one that back-stops the entire banking system, is gutted in the process. It's a debt shell game and until there is real capital formation the banks will continue to report what numbers they need to satisfy the greatest cross-section of investors and regulators. No one saw the LIBOR scandal coming; can we be sure there are no other scandals lurking around the corner when nothing has fundamentally changed?