Here’s an excerpt from an interesting article by Barry Ritholtz, about the Financial Sector
Read It Here First: Half of Wall St. Profits Are Gone (So Far)
"Last year, we looked at the issue of risk adjusted gains for the S&P500, and most especially for the Financial sector.
At the time, Financials were the largest sector in the S&P500, and had what were described as legitimate, sustainable, normalized risk-based earnings. Since then, we have learned that their earnings were anything but. And, they are no longer the largest S&P500 sector, having been supplanted Technology in Q2 2008.
Societe Generale’s James Montier notes that, even with the loss of leadership, financials remain an exceptionally large component of the market itself. As the chart below shows, today’s 17% of market cap may be well off the high of nearly 25% but remains a long way above the levels before this bubble started…."
"Note also that a good part of the rise over recent decades has been fueled on assumptions about risk that turned out to be incorrect. The NYT discusses this:
‘Only a year ago, Wall Street reveled in an era of superlatives: record deals, record profit, record pay. But a mere 12 months later, nearly half of the profits that major banks reaped during that age of riches have vanished.
The numbers are staggering. Between early 2004 and mid-2007, a period of unprecedented wealth on Wall Street, seven of the nation’s largest financial companies earned a combined $254 billion in profits….’"
Check out the table of profits vs. write-downs, from the NY Times. For example, Merrill Lynch’s write-downs through the second half of ’07 to the first quarter of ’08 were 153% of the earnings from 2004 through the first half of ’07. Goldman Sachs did much better, the corresponding write-down being only 12% of the earnings for the same time periods.
