Fresh troubles at Freddie Mac, Countrywide and HSBC show that capital destruction continues to afflict the financial sector. As share prices fall and balance sheets buckle under the strain, troubled institutions can be expected to cut costs, and heads, beyond the relatively shallow steps undertaken over the past three months.
The largest banks are approaching an "inflection point," and job candidates should prepare for "some pretty powerful aftershocks," warns Jay Gaines, chief executive of Jay Gaines & Co., a New York search firm.
The latest focus of attention is Citigroup. On Monday - a day before Citi announced a $7.5 billion capital infusion from the Abu Dhabi Investment Authority - CNBC reported the bank plans to slash as many as 45,000 jobs. The story, based on unnamed sources, remains unconfirmed. Citi says it's looking at possible cost cuts but states, "any reports on specific numbers are not factual."
No official layoff announcement is likely until Citi completes its search for a new chief executive. But CNBC says dismissals have already begun in some areas, "with managers being told by their supervisors that they have to eliminate whole departments," in the network's words.
As a rule, bankers let go this late in the year would most likely be paid their full-year bonuses, according to one external recruiting firm we spoke with. Another recruiter says that if CNBC's report proves true, underlying demand remains strong enough for most of the newly dismissed bankers to land new jobs after the New Year.
A major layoff at Citigroup would be its second in less than a year. The company eliminated 17,000 jobs just last April. Since then it's been battered by the mortgage and credit meltdown that's lopped some $60 billion off the value of assets at the world's biggest investment and commercial banks. Citi has fared worse than most: Expenses remained stubbornly high, while management struggled to get a handle on mortgage-related exposures. Just a few weeks after taking a $5.9 billion write-down for the third quarter, the company said it expects a further $8 billion to $11 billion write-down in the fourth quarter.
The losses are forcing Citi and other major institutions to shore up their capital base, both by trimming operations and seeking external funding. Fannie Mae and Freddie Mac, the two government-sponsored firms that are linchpins of the secondary mortgage market, are selling preferred stock this month after large third-quarter losses depleted their capital. On Tuesday, Freddie Mac launched a $6 billion preferred stock sale and cut its commons stock dividend for the first time since going public in 1989.