Wall Street investment banks, stung by debt losses, have cut tens of thousands of jobs, but even more significant cuts are coming in the months ahead amid a bleaker earnings outlook.
Some of the securities industry's biggest profit drivers -- mortgages, junk bonds and leveraged buyouts -- have been stopped in their tracks by the credit crunch. Investment banks in recent months have absorbed $150 billion in mortgage and corporate loan losses and face new pressures to slash spending.
Analysts and corporate headhunters say banks have been chipping around the edges, but as the outlook for business grows dimmer, more layoffs will be announced.
There's more job cuts to come in the next two quarters. It's not over yet, said Michael Karp, chief executive of Wall Street recruiting firm Options Group.
Firms humbled by a difficult 2007 face more write-downs and lower banking fees this year. Brokerage analysts expect the more difficult environment will lead to lower revenue, putting pressure on firms to reduce costs -- especially compensation.
Financial services firms eliminated more than 52,500 jobs in the second half of last year, a New York City official said this week, based on a quarterly study.
By comparison, firms slashed about 90,000 U.S. jobs, or 11 percent of total employment, in the two years after the tech stock bubble burst in 2000, Securities Industry and Financial Markets Association data show.
By August last year, U.S. securities industry employment rose to a record high of about 850,000, said SIFMA, which doesn't track Wall Street's substantial and growing headcount in Europe, Asia and other markets.
Boston Consulting Group's Achim Schwetlick estimates firms might reduce headcount by 5 to 7 percent.
It's going to be a tough year on Wall Street, said Jeanne Branthover, head of the financial services practice at Boyden Global Executive Search. The firms are strategizing over what businesses will make money and where they can cut.
HOLDING OFF BIG CUTS
Wall Street for more than four years was on a tear, expanding businesses and extending its reach into new markets as firms generated record profits. Banks added nearly 100,000 U.S. jobs in that period, SIFMA data show.
But the environment soured last year. Investors turned up their noses at buyout loans as part of a flight from risk with roots in the subprime crisis. Mortgages and related securities plunged in value amid the worst housing market in 25 years.
Goldman Sachs Group Inc, Lehman Brothers Holdings Inc, Merrill Lynch & Co Inc, Bear Stearns Cos Inc and Morgan Stanley have been cutting staff since June, though the pink slips have been on the rise since late January.
So far, U.S. and European securities firms have been cutting a few hundred jobs at a time, slashed bonuses to shoo unwanted executives out the door or fired people under the cover of annual performance reviews.
Most cuts have involved residential mortgages and asset-backed securities, which are clearly in a prolonged slump. Remaining businesses, though remain relatively untouched, even as analysts predict slumps in mergers and stock offerings.
But banks are being cautious because it took them years to rebound from deep cuts in 2000, with some firms like Merrill missing out on the first legs of the recent bull market.
A bet is being made here that there will be a decent business down the road, maybe not at the levels seen at the peak of the recent cycle, and you don't want to lose talent, said Boston Consulting Group managing director Shubh Saumya.
Lehman announced 1,300 mortgage job cuts in the last month, a move that followed 850 layoffs in September, about 1,200 in August and 400 in June. Morgan Stanley has announced 2,900 cuts since October, but only a few hundred outside of mortgages.
With the environment only getting worse, analysts are slashing their profit forecasts and predict a new round of credit losses driven by corporate loans, commercial real estate and other consumer loans.
Headhunters say Merrill, UBS AG and Citigroup, which have announced staff reductions, will make more cuts in the next few months.
Firms are busy strategizing now, looking at where they make money, Branthover said. We see so much change happening in strategy and business, and over the next few months they'll implement those changes.
Boston Consulting expects it will take two to three quarters before the industry gets more clarity. If the market conditions haven't improved materially, then there is a potential for a more aggressive pull back among the firms, Saumya said.
Wall Street will also be tightening its belt by going after expenses such as vendors and consultants or perks like car services and deluxe air travel. Firms may also increase their use of outsourcing and automation.
Bernstein Research analyst Brad Hintz, though, expects brokers will put off laying off employees until after the summer because the bulk of their compensation comes at the end of the year as bonuses.
If the base salary of a $2 million managing director is only $200,000 a year, why not keep him and see if things work out? Hintz said. It's clear you have the wind in your face, but you don't have to cut back until it's clear no new business is coming.
(Editing by Gerald E. McCormick)