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Why Wall Street's Hiring Binge Is Bad News


A new chapter in a history of failing to learn from its own lessons.

There are signs of life in employment at the battered Wall Street sector. And that's a bit troubling.

US banks, such as Goldman Sachs (GS), Bank of America (BAC) and JPMorgan (JPM), are on a hiring binge, according to Reuters. They laid off too many workers during the downturn and are now trying to catch up with smaller banks and foreign firms who weren't hampered by the government scrutiny that accompanied the bailouts.

"Back in March and April, no one really knew if the investment banking business was going to exist again," David McCormack, managing director at search firm Sheffield Haworth in New York, told Reuters. "The world has changed dramatically in the last four to five months and now banks are hiring."

But here's the rub: There are plenty of good reasons to believe the world hasn't actually changed dramatically in the last 4 months.

The watchdog of the Troubled Asset Relief Program released a report this morning that suggests the $700 billion bailout has done little to relieve the banks of their troubled assets. Banks are still holding billions in bad loans that have yet to be valued by any functioning market activity. While the biggest banks, which underwent so-called "stress tests" to measure their viability, should have adequate capital to cover more write-downs, many smaller banks remain vulnerable due to their exposure, the report says.

Just how much crap still remains on bank balance sheets? It's impossible to know, but estimates range from $600 billion to $1.3 trillion. Any way you look at it, that's a lot of write-downs still to come.

Moreover, many banks have reason to worry about the quality of some of their assets shrinking further. As Minyan Peter notes, during the past 18 months, banks have seen loan quality decrease as good creditors turned to bad and at the same time they've watched as their few remaining good borrowers pay down their loans. The convergence of these 2 factors doesn't bode well for bank loan portfolios.

This hardly makes it sound like it's time to start over with a clean slate and a hiring spree on Wall Street. Yes, there are certain sectors of the banking business that are performing well. But a few good months of great trading activity doesn't translate to a fresh start.

Indeed, many economists are expecting a long, slow economic recovery, in part because so many sectors of the economy were suffering from over capacity. The recession helped to "re-size" many of them to levels more sustainable for long-term growth, as Minyan Peter wrote last week.

Most taxpayers are pleased that some banks have been able to pay back their bailout money and move forward. News that Goldman Sachs and JPMorgan had great earnings last quarter also helped fuel the good mood that's swept the market this summer.

But let's not forget about Wall Street's notoriously short memory span and its history of failing to learn from its own lessons.

Perhaps no industry needed resizing more than the bloated banking sector did. Where is the resizing of Wall Street?
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