The Financial Sectors had a roller coaster 2011 as the early months seemed to indicate the recovery was on its way, only to experience a reversal amid fears and exposure to a shaky Europe and a massive U.S. debt.
The reduction of the U.S. credit rating from AAA to AA+ was among the major financial events of the year. The decision by the S&P shook consumer confidence ands caused massive swings of volatility in the market with banks being the hardest hit.
Banks were also under increased scrutiny late in the year as a result of Occupy Wall Street and a number of Federal reforms putting shifts at the bank into the spotlight. A Bank of America (BAC) decision to introduce a $5 monthly charges for its debit card users was widely publicly reviled after Occupy Wall Street shed light on the issue. Other banks, struggling with recessionary pressures were also forced to table their own reforms in the midst of the public scrutiny.
Many investors are disappointed with the performance of the sector this year, with some banks Goldman Sachs, for instance, reporting losses for the first time since 2008. Many investors flooded banks early in the year finding the top played from Citigroup © to J.P. Morgan (JPM) technically appealing on the basis of the discounted prices.
Now many of them are likely regretting the decision as the year ends on a weak point and some believe that technical metrics based on past performance may no longer apply. Slowing emerging markets, a weak Europe Europe and America’s slow growth in terms of a housing market recovery are threatening to continue to challenge through 2012.
One investor who seems bullish on banks and their potential recovery though, is Warren Buffett. Through his Berkshire Hathaway fund, Buffett saved Bank of America from the brink of collapse earlier in the year by investing $5 billion in funds. Bank of America for its part has reduced its work force by over 30,000 in an effort to stabilize but a large majority are bearish about its recovery.
Shortly after Buffett’s investment decision, shares of Bank America soared 25 percent, but the numbers were quickly reversed when the internal and external struggles of the bank and the industry itself came back into the spotlight.
In terms of their internal struggles, a number of the top firms are still involved in ongoing legal battles with the U.S. government as a result of their involvement in the mortgage crisis. Bank of America is one of them. U.S. appeals courts are currently reviewing whether BofA’s $8.5 billion settlement should return to a New York state court for approval; as some investors continue to push for a higher payout.
Citigroup (C) is in a similar situation, as ongoing accusations of fraud make it difficult for them to recover.
In order to mitigate some of the losses resultant of the weak global economy and legal struggles, banks began massive cuts that further weakened confidence in the industry.
Morgan Stanley (MS) announced plans to shed 1,600 in the first quarter of 2012, roughly 2.6 percent of its total work force. Citigroup (C) intends to reduce its work force by about 2 percent or 4,500. The layoff cost the bank close to a half a billion dollars in severance fees earlier in the year but the top executives are hoping it can translate to greater profitability in 2012. Wells Fargo (WFG) will eliminate many technology and operations jobs by the end of year as part of its Project Compass program in order to reduce quaterly operating expenses by $1.5 billion. UBS (UBS) said it will cut 1600 jobs while JP Morgan Chase (JPM), did not release the exact number of lay offs.
On the whole, the sector is trading lower for 2011, having tumbled close to 20 percent for the year.