Financial Services: Subprime and Credit Crisis Weighs Heavy
FINANCIAL SERVICES INDUSTRY ABSTRACT
2008 Edition
The financial services industry has been experiencing a historic crisis phase since the credit crunch evolved. The industry is presently under substantial pressure because of the decline of housing markets, which started in 2007 and is expected to continue well into 2009. The impact of the credit crunch has been severe, and devastating in many cases, as the basic structure of the industry has transformed over the course of weeks. A pre-Glass-Steagall financial world has emerged, one with large diversified financial institutions, providing services from commercial banking to investment banking, and certainly with broader regulatory oversight coming soon.
As subprime mortgage losses continue to mount in 2008, the impact of the same has not remained limited to commercial banks but has spread to other financial firms as well. A series of disturbing events in the financial services sector has retarded deal activity in the U.S. financial services market. For the current year, significantly lesser number of deals has been announced in the industry. Similarly, after a robust year of initial public offering (IPO) activity in 2007, the number of IPOs has declined in the U.S. in the first half of 2008. Uncertainty in the U.S. market has resulted in the adoption of thrifty approaches by companies planning to go public.
Firms are implementing various options to counter challenges arising in the market. Job cuts, as a part of the restructuring plan that started in 2007, have continued so far, and although such planned job cuts are happening across all industries, financial services firms top the list. Since a major proportion of operating expenses in the industry is tied to compensation and benefits of employees, firms are looking to slash jobs in a hurry. Even the largest of the firms in the industry, such as Citigroup, Bank of America, JP Morgan Chase, and many others, have repeatedly announced job cuts from their current workforce. Other firms with more severe fates, such as Bear Stearns and Lehman Brothers, are witnessing even more severe cuts. The problems of investment banks are not limited to this; regulators have alleged that brokerage firms have misled investors and sold highly illiquid auction rate securities projecting them as safe and cash equivalents. Other regulatory actions are certain regarding their treatment of mortgage-backed securities. An increased number of lawsuits have already been filed against a number of investment banks, as well as other financial players such as mortgage brokers, alleging them of misrepresenting their products.
However, the Federal Reserve and the U.S. Treasury Department have taken extreme measures to resolve the current crisis. In addition, the Treasury Department has introduced a new proposal, which empowers the Federal Reserve to oversee the stability of financial markets. The proposal includes merging the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) to oversee securities and futures trading. Under another important restructuring clause, other financial supervisory bodies will be replaced by only three large agencies. However, any corrective measures taken by the Federal Reserve and government agencies will only reflect in the medium-to-long term and the industry is expected to continue to operate under immense pressure in the current year.
Please note that the full industry report is available on Advisen Corner (Corner.Advisen.com) for purchase, and is complimentarily available to Advisen subscribers. The full report provides an overview of this industry, discusses its business environment, and as importantly, provides an analysis of its business initiatives and associated risks. To learn more about Advisen, visit www.advisen.com or call +1.212.897.4800.
