Brimming with feelings of indignity shared by many of his contemporaries in the banking sector, yesterday JP Morgan’s (NYSE:JPM) CEO Jamie Dimon took Federal Reserve Chairman Ben Bernanke head-on. Dimon questioned the Fed Chief inquisitorially, demanding some accountability from a Bernanke, and a larger Government, that has been increasingly hard on banks. “I have great fear that someone in the future will see that everything we did to try to restore (the economy) after the crisis had effect of slowing recovery, are we holding banks at bay?” asked Dimon.
Bernanke didn’t have a good answer for him, and it seems that Dimon was speaking the truth as today Bloomberg reports that six of the biggest banks on Wall Street have payroll cuts and job layoffs in the works. The big banks, Bank of America (NYSE:BAC), Citigroup (NYSE:C), JP Morgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC), Goldman-Sachs (NYSE:GS), and Morgan Stanley (NYSE:MS), are entering dire financial straights, with several of the companies stocks trading near all time lows. Collectively the group is expected to post net revenue declines of nearly 4% this quarter, and the near-term outlook isn’t getting any brighter.
According to financial industry analyst John Garvey the rationale for a drowning banking sector is very straightforward, “Without any change, the financial sector is definitely set to shrink… You don’t have to be a scientist to figure out that tighter regulation and more onerous capital rules without economic growth will shrink the industry. It has to.”
Banks’ balance sheets are down for several reasons, most prominently among them the implementation of a throng of new federal finance regulations such as limits on debit and credit card fees, stricter capital and liquidity requirements, and higher standards for mortgages. As if the banks didn’t already have enough on their plates, another host of new rules is underway via agreements from the Basel Committee on Banking Supervision, which must be met by private lenders by 2013.
Legal troubles are also looming large as U.S. Attorney General Tom Perelli is working with state AGs across the country to prosecute bankers for “foreclosure abuse” and other activities contributing to the financial crisis in 2008. Perelli is seeking a settlement of $20 billion.
Less income from loans and credit lines, lower interest rates, a slumping housing market, and a weak job environment are creating something of a perfect storm for the financial industry, and share prices are beginning to reflect the burden they are facing. A short-time ago renowned investors David Tepper and John Paulson sold most of their holdings in bank stocks. Given the current economic climate and harsh regulatory environment, one might wonder why any intelligent investor would do otherwise.