As fallout from the summer credit crunch spreads, Wall Street faces more job cuts -- and smaller bonuses.
Investment banks have announced thousands of jobs cuts as investors stopped snapping up risky corporate loans, mortgage securities and complex asset-backed securities.
And headhunters who help bankers and traders find jobs see layoffs ahead.
There could be massive layoffs in areas that were built up quickly over the past three to four years, Korn/Ferry headhunter Jonathan Kim said. We'll see a number of cuts in the areas that lost money.
Investment banks have so far this year set aside 8 percent more money for compensation than they had for the first three quarters of last year. But do not expect bonuses to be higher at most investment banks, recruiters said.
You can't lay off people and have high bonuses. That's unseemly, said John Challenger of outplacement firm Challenger, Gray & Christmas.
Wall Street's richly compensated bankers have been a major pillar of the New York City economy, supporting real estate prices and everything from five star dinners to expensive sports cars.
The five largest investment banks -- Goldman Sachs Group Inc (GS.N: Quote, Profile, Research), Morgan Stanley (MS.N: Quote, Profile, Research), Merrill Lynch and Co Inc (MER.N: Quote, Profile, Research), Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research) and Bear Stearns Co Inc (BSC.N: Quote, Profile, Research) -- combined paid out a record $61 billion in compensation last year.
The investment banks have so far set aside about $52 billion of compensation expense for 2007, up from $48 billion for the first three quarters of 2006, helped in large part by Goldman Sachs, which is about $3 billion ahead of last year on compensation expense.
After humming along in 2006 and early this year, financial markets tumbled in July and August. Worries about subprime mortgages triggered a broader credit crunch, as investors withdrew, deal activity slowed and asset values plunged.
Broker-dealers have responded by cutting jobs. In recent weeks, Morgan Stanley, Bear Stearns, Lehman Brothers and Credit Suisse each announced cuts in residential mortgages, banking and leveraged finance.
Banks with particularly heavy losses -- UBS, Citigroup and Bank of America -- set even deeper cuts and raised the possibility more cuts are ahead. Merrill Lynch and Co Inc (MER.N: Quote, Profile, Research) is expected to cut jobs after a third-quarter net loss fueled by mortgage and leverage loan losses.
We're not done, Gary Goldstein of Whitney Group said. These are not across-the-board cuts, though. The cuts will take place across the areas hit hardest.
And with revenue possibly coming under pressure, Wall Street firms will cut costs. Bonuses are expected to slip between 5 percent and as much as 30 percent, depending on the business and firm.
Several headhunters stressed there is still some hiring in fast growing businesses. Hedge funds and buyout firms meanwhile have been picking up traders, bankers and analysts who have been cut loose.
Landfall Partners' Tom Cleary said some Canadian and European banks are taking advantage of the layoffs to hire some top tier bankers.
There are quality organizations who will take this opportunity to grow their business, Cleary said.
That said, nobody really knows when debt and deal markets will recover. If the credit crisis persists, cutbacks could spread to other parts of the bank.
We're in a situation where people don't really know what's happening, said Les Stern, a veteran search executive at Heidrick & Struggles. So it's not over yet. When more stuff hits the fan, the banks will respond.
Still, many recruiters polled by Reuters agreed that, overall, the state of Wall Street employment was in reasonably good shape, compared with other periods of mass layoffs such as following the 1987 crash and after the Internet bubble popped in 2000.
I've been through some scary times on Wall Street, said Stern, who has worked as a placement executive since 1968. I don't find this period to be in the same league.