Wall Street plans to get smaller this summer. Faced with weak markets and uncertainty over regulations, many of the biggest firms are preparing for deep cuts in jobs and other costs.
The cutback plans are emerging even as Wall Street firms have mostly recovered from the financial crisis and are reporting substantial profits again. But those profits are not as big as they were before the crisis, and it is expected that in the coming months it will be even more difficult for firms to make money. Worries about debt in Europe and the shape that the Dodd-Frank financial overhaul rules will ultimately take, combined with the usual summer doldrums, are prompting banks to act.
“It’s a tense environment right now,” said Glenn Schorr, an analyst with the investment bank Nomura.
Even Goldman Sachs , Wall Street’s most profitable firm, is retrenching. Senior executives at Goldman have concluded they need to cut 10 percent, or $1 billion, of noncompensation expenses over the next 12 months, according to a person close to the matter who was not authorized to speak on the record. The big pullback will cause Goldman employees, who have already been ordered to cut costs, to re-examine every aspect of their business.
The firm, this person said, had not set final targets for layoffs, but Goldman was “certain” to shrink headcount in the coming months. Decisions on bonuses are still months away, but they are sure to come down as well if business does not pick up.
Bank of America is also examining its expenses and is likely in the next few months to cut some staff members from its securities division, according to one senior executive at that firm who was not authorized to speak on the record. And Credit Suisse is in the process of identifying people to cut in its investment banking unit, according to a person briefed on that bank’s plans.
Morgan Stanley is expected to cut at least 300 low-producing brokers in its wealth management division this year, more than the firm initially expected, and has announced plans to cut $1 billion in noncompensation expenses over the next three years. Unlike many of its rivals, however, the firm so far has no plans to cut staff members from its investment banking and trading division, which has added hundreds of employees over the last two years or so as part of a rebuilding effort after the financial crisis.
Some firms have already wielded the ax. In January, Barclays Capital cut 600 people, or more than 2 percent of its worldwide staff, citing a business slowdown, and recently cut more employees for “performance-related reasons,” according to a person briefed on the cuts but not authorized to speak on the record. A third of the January cuts were in New York.
Regulatory overhaul has weighed on the decisions to cut back, senior bank executives say. Regulation has caused some Wall Street banks to exit some businesses, like proprietary trading. Rules that require banks to hold more capital will probably cause some firms to end certain business lines as they decide they can more effectively deploy the capital elsewhere. On products like derivatives, firms will lose revenue as instruments once traded off exchanges will move into open markets.
While many financial rules are still to be written, some firms have decided that they cannot afford to wait any longer. The last significant industrywide job cuts were in early 2009. In the first quarter of that year Goldman alone cut its work force by almost 9 percent. Since then, most firms have held steady on their head counts or have added to them slightly. That will change this summer.
The scale of the expected cuts is bad news for the New York City economy, which depends heavily on a booming financial industry to pay taxes and fill its restaurants. And they will come as the national economy is still struggling to find its footing since the financial crisis.
Not all is doom and gloom. Wall Street is benefiting from the boom in social media and technology public offerings. In recent weeks big names like Pandora Media and Linkedin have gone public, brought to market by banks. So far this year, companies have raised $29.3 billion in public offerings, up more than 200 percent from a year ago. This year is on track to be the most lucrative since the technology boom in 2000, according to Thomson Reuters data.
The profit picture is also somewhat more stable for diversified companies like JPMorgan Chase, Bank of America and Citigroup , which have large commercial retail banking operations in addition to those in trading and sales. JPMorgan has no immediate plans to cut head count in trading, according to a person briefed on the matter but not authorized to speak on the record. The bank is, however, trying to reduce noncompensation expenses.
But firms like Bank of America are still paying for mortgage sins of days gone by, which have dimmed their profit pictures. Earlier this year Bank of America put aside another $1 billion to cover claims from outside investors who lost money and want the firm to buy back billions of dollars in bad Countrywide Financial mortgages. The Durbin Amendment, a proposed restriction on debit card fees, is also expected to reduce profits when it comes into effect next month.
For those firms that depend on trading, it is clear how much the engines of Wall Street have slowed. Return on equity, the amount a firm earns on its common stock outstanding and an important measure of financial performance, has decreased significantly in the years since the credit crisis. Industrywide return on equity was 8.2 percent in 2010, down from 17.5 percent in 2005, according to Nomura.
And this year there is another reason that is prompting Wall Street to act more swiftly on cuts. Wall Street typically pays out roughly half of its revenue in compensation, and firms often wait until late summer to cull staff when they have a better sense of revenue for the year. The newest cuts are expected to come earlier this year because of recent changes in the way employees are paid.
Traditionally, Wall Street employees get most of their annual pay in the form of a one-time year-end bonus. But after the credit crisis most firms changed the way they compensated employees in an effort to discourage excessive risk-taking, increasing base salaries while reducing performance-related payments. As a result, banks are paying out more compensation as the year goes on, forcing firms to re-evaluate staffing levels earlier in the year because more of their compensation costs are now fixed.
Firms are also trying to cut noncompensation expenses and are looking for ways to cut fat. Goldman’s goal to cut $1 billion in noncompensation expenses this year is significant, analysts say. There will be immediate and significant savings from the fall off in trading volumes.
Trading firms pay fees to trade, and lower volumes could result in an annual savings of $200 million at Goldman alone, one analyst estimated. Those savings will come naturally, but most will not, and banks will be forced to rein in everything, including travel and professional fees.