What's Happening in the Financial World (10/30/2012)

UBS A.G. (NYSE: UBS) has made it official. It will cut 10,000 jobs, primarily in its fixed-income operations. The financial firm said the move will save it $3.6 billion over the next three years. The cost of that is the elimination of 15% of it employee base. “This decision has been a difficult one, particularly in a business such as ours that is all about its people,” CEO Sergio P. Ermotti said in a statement. The financial industry almost certainly is not done with the restructuring that has gone on for more than a year now as some portions of the industry have lost business. And some banks already have said they will cut more staff. At the head of the list is Bank of America Corp. (NYSE: BAC), which plans to fire 30,000 people. Investors have said that a change at the top of Citigroup Inc. (NYSE: C) will start a reevaluation of all the bank’s divisions and staff levels. Usually that means a new CEO wants to put a mark on his company. In banking, that almost certainly signals layoffs.

Spain’s Recession

Spain slipped further into recession, which means that its need for aid has accelerated. Its gross domestic product for the third quarter dropped 0.3%, on top of a drop of 0.4% in the quarter before. Spain has an unemployment rate above 25%. The awful numbers have triggered a series of undesirable issues. The first is that austerity plans will be set in place, and these will undermine growth as incomes and employment drop further and gut the tax base. This in turn will cause more budget cuts, which will damage the economy even further. Since there is no appetite among Europe’s stronger nations to supply stimulus money, that way out of trouble is blocked. Social unrest is on the rise in Spain, as well. While the effects of this cannot be measured because no one knows how widespread they will be, strikes and protests could destabilize the current government. And people who walk off the job for a time contribute to a drop in the tax base.

Japanese Easing

Concern about the Japanese economy has increased as the Bank of Japan extended its bond-buying program. The central bank increased its commitment by $138 billion. The entire effort is expected to last through 2013. The plan is not a panacea. Most central banks around the world already have issued warnings that they cannot offset recessions, at least not entirely. The other message from these banks is that legislative policy is the only way to address the major problems that face the developed economic. But the Bank of Japan’s effort may help the country a little, as its poor growth has been further hampered by a disintegration of its trade with China, brought on by territorial disputes. Several of Japan’s largest companies have warned that their earnings have been affected already and that the problem will worsen between now and year’s end if the dispute continues.

Douglas A. McIntyre