This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Is A (once Again) Super-sized Financial Sector Holding Back The U.S. Economy?

Stocks in this article: BACCGSJPMMSWFC

By Xavier Brenner

super sized

As the fifth anniversary of the U.S. financial crisis draws near, Wall Street firms find themselves rolling in profits. U.S. financial companies are now ringing up the fastest earnings growth in the Standard & Poor’s 500 Index (SPX). Look at how the Financials trounced earnings estimates for the latest quarter:

sector beats

On top of the surging earnings, financials are getting close to reclaiming their bragging rights as the stock market’s biggest industry by market capitalization. Alex Barinka and Whitney Kisling at Bloomberg note that:

Banks, brokers and insurance companies make up 16.8 percent of the S&P 500, almost double the level from 2009 and closing in on technology companies at 17.6 percent…The last time financial shares were the biggest group in the S&P 500 was May 2008, four months before Lehman Brothers Holdings Inc. filed the biggest bankruptcy in American history.

The market cap gains come from the strong stock performance – not surprising given the recent earnings gains:

GS Chart

GS data by YCharts

Another sign of the Wall Street revival since the 2008 financial meltdown is bank asset size. Amazingly, despite the Dodd Frank reforms to prevent systemic financial risk, the U.S. banking system has become even more concentrated.

The top five banks–JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Citigroup (C), Wells Fargo (WFC), and Goldman Sachs (GS) — held $8.5 trillion in assets at the end of 2011, equal to 56% of the U.S. economy, according data by central bankers at the Federal Reserve. In 2006, the figure was 43%.

By one measure, using international standards for derivatives and consolidating mortgage securitizations, U.S. bank assets are roughly 170% the size of the entire $15 trillion American economy, according to Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp

So while the comeback of the high and mighty on Wall Street has been great news for stock investors in major banks, the living large U.S. financial sector may not be beneficial to the overall economy. Some economists believe that financialization—the outsized growth of the financial sector relative to overall gross domestic product—may be holding back the American economy.

Earlier this summer, Bruce Bartlett at the New York Times outlined the major academic research that casts an unflattering light on the over-sized U.S. financial sector.

Financialization

Here are the major findings.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,461.32 -153.49 -0.92%
S&P 500 1,927.11 -14.17 -0.73%
NASDAQ 4,382.8470 -36.6310 -0.83%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs