Analysis: Wall St. Set To Shrink, With Jobs And Bonuses At Risk
By Steven C. Johnson
(Reuters) - The thousands of protesters camped out in New York's financial district may not see it this way, but these are not the best of times for Wall Street.
Financial sector job cuts so far this year are already running ahead of the total for all of last year. And things could easily get worse if weak financial results spur shareholders to demand banks tighten their belts even more.
In addition to volatile markets, skittish investors and sluggish growth, there are also growing fears that new regulations will limit hiring and depress salaries for years to come.
"I think you have to ask, 'Why hire here?,'" said Alan Johnson, managing director at financial pay consulting firm Johnson Associates. "It's expensive, regulation is headed in the wrong direction and growth is mostly happening elsewhere -- in Asia and Latin America."
Cost-cutting is already in full swing. Planned layoffs across the entire financial services sector, which includes commercial banking and insurance, hit 54,013 in the nine months to September, according to outplacement firm Challenger, Gray & Christmas, up 177 percent over the same period in 2010.
New York State Comptroller Thomas DiNapoli said Tuesday New York City's securities industry, which comprises investment banks and brokerages, could lose up to 10,000 jobs by the end of 2012 -- bad news for the local economy.
A series of major investment banks, including Goldman Sachs Group (GS.N), Barclays Plc (BCS.N) and Credit Suisse have announced job cuts. Bank of America said last month it would slash 30,000 positions over the next five years.
Those who hang on to their jobs, meanwhile, may take home less money. According to an eFinancial.com survey, 46 percent of Wall Street employees say they expect bonuses to decrease over the next three years, up from 30 percent who said that last year.
Johnson said he expected a 20 percent to 30 percent decline in the levels of investment bank bonuses for 2011.
"The top line this year was just not as good as we were all thinking and hoping," he said.
Tough Trading Environment
The third quarter was a tough one for banks as Europe's debt crisis worsened and chaotic market conditions wrecked havoc on trading revenues.
As earnings season gets underway this week, analysts are expecting a meager 2.5 percent increase in financial sector profits for the quarter, according to Thomson Reuters data. As recently as June, they were projecting a 15.6 percent bump.
Oppenheimer this week cut targets for Bank of America (BAC.N), Morgan Stanley (MS.N), JPMorgan Chase and Citigroup and forecast a quarterly loss for Goldman Sachs - which would be only its second ever as a private firm.
A sluggish U.S. economy hasn't helped either. Growth slowed to a crawl in the first half of the year, and investors say weak consumer spending and demand for loans has pressured banks' margins and revenue.
What's more, the uninterrupted boom conditions the financial sector experienced for the better part of two decades, which had become the norm, may never return.
Lakshman Achuthan, head of the Economic Cycle Research Institute, said the end of the credit boom that sustained the prolonged economic growth of the 1990s and 2000s meant the economy was reverting to a more volatile period of shorter expansions and more frequent recessions.
The U.S. economy pulled out of recession in June 2009 and ECRI said last month it was on the verge of a new one.
"We are moving into a boom-bust era, and that can be deadly for investors with a buy-and-hold approach or businesses that can't turn on a dime when they get into trouble," he said.
That's why Hugh Johnson, president of Albany-based asset management firm Hugh Johnson Advisors, said things will get worse before they get better.
"On a year-over-year basis, there's a very strong chance we'll have a profit recession next year, and we could see S&P 500 operating earnings turn negative," he said.
Escape From New York?
A smaller and less profitable Wall Street also spells trouble for New York City's economy, which has been one of the country's strongest.
Marisa Di Natale, who analyzes the New York economy and securities industry for Moody's Analytics, said financial sector layoffs may persist through 2012. Analysts fear that could reduce local tax revenues, push down local home prices, and hit employment and incomes.
New York's comptroller estimated in his report that one in eight New York City jobs and one in 13 New York State jobs depends on securities firms.
Di Natale said strength in other New York industries, including tourism, professional services and advertising, may cushion the blow.
"The city has diversified to the point where everything doesn't hinge on financial services, so I'm more optimistic this time," she said. "But if both the U.S. and Europe go into recession, that's another story."
Some also fear new cumbersome bank regulations, including limitations on certain types of trading and salary structures, mean some of the Wall Street jobs lost may never come back.
"We are looking at a major structural change in the brokerage industry," said Richard Bove, a bank analyst at Rochdale Securities. "As one CEO recently told me, people in the industry have to understand that the funds just aren't there for the kind of compensation that was paid in 2005."
In addition, some fear changes in investment bank pay structures mandated by the Dodd-Frank financial laws may contribute to job losses.
That's because in years past, firms supplemented salaries with large bonuses that they would cut when times got tough.
Now, with more of the money paid out in base salaries, firms that need to save are forced to cut jobs. Paul Sorbera, president of Alliance Consulting, said typical salaries for senior bankers have more than doubled to between $400,000 and $500,000 a year.
But a smaller financial sector isn't necessarily bad for the broader U.S. economy, said Thomas Philippon, a finance professor at New York University's Stern School of Business.
He said regulations that require banks to hold more capital to defend against a crisis means taxpayers won't have to bail them out, a net positive for the economy.
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