Wall Street firms, set to take in the lowest revenue since 1997, are likely to cut more jobs in coming months, recruiters and money managers say.
In 1997, investment banks including Morgan Stanley Dean Witter & Co., Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. employed about 285,996 people. Now the workforce is 346,221, or 60,000 higher, according to industry statistics, even after the biggest cutbacks in a quarter century.
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Firms refrained from more firings in part because they expected an economic recovery would spur stock sales and mergers, boosting fees and profits for the industry, some investors say.
With mergers down 43 percent this year and stock sales 13 percent lower, Morgan Stanley, Goldman, Lehman and Bear Stearns Cos. next week are likely to report an average drop of 10 percent in quarterly profit, analysts say.
“Major cutbacks have to happen because it’s just impossible to imagine current staff levels in this business environment,” said Richard Lipstein, managing director at recruiting firm Gilbert Tweed Associates Inc.
The industry generated $38 billion in revenue in the first quarter, according to the Securities Industry Association. At that rate, Wall Street firms would take in $152 billion this year, the lowest since 1997’s $145 billion, the group’s statistics show.
Revenue of $152 billion would be a drop of 22 percent from last year’s $195 billion and a 37 percent decline from the industry’s peak of $245 billion in 2000, SIA statistics show.
Not Even Close
Securities firms’ business “isn’t even close to bottoming out,” said money manager Chris Baggini, who owns Goldman shares in his $400 million Gartmore Growth Fund.
The cutbacks so far on Wall Street — firms eliminated 62,000 jobs in the 12 months ended in May, the U.S. Labor Department says — have reduced expenses. Still, they haven’t been enough to offset the decline in revenue from the slump in underwriting and merger advice.
“The people losing their jobs this time around are people who were dealmakers,” said Shaun Springer, the head of Napier Scott Group, an executive search firm in London.
Merrill Lynch & Co., which saw profit per employee fall to $9,980 last year from $52,560 in 2000, cut 15,000 jobs in 2001. As a result, non-interest expenses fell to 80 percent of revenue in the first quarter from 85 percent six months earlier.
Goldman’s expense ratio fell to 77 percent in the February quarter from 79 percent in August, while Morgan Stanley fell to 70 percent from 74 percent, and Bear Stearns dropped to 78 percent from 83 percent in the same span.
Credit Suisse Group will continue “focusing on cost-control efforts,” Chief Executive Officer Lukas Muehlemann said last month as its New York-based securities arm, Credit Suisse First Boston, reported a first-quarter loss even as personnel expenses fell 30 percent.
Firms in Europe, including Schroder Salomon Smith Barney, UBS Warburg, and Dresdner Bank AG, plan further cutbacks.
“I expect the hemorrhage to continue all throughout the summer,” said Philip Middleton, a partner in the financial services division of Ernst & Young in London. Executives “are just starting to realize that they’ve hung on to people in the hopes that things would pick up and it’s not going to happen.”
Falling Stocks, Falling Earnings
In the U.S., the Standard & Poor’s 500 Index is down 12 percent in 2002 and may have a third straight annual drop for the first time since 1939-1941.
With stock prices dropping, chief executives aren’t willing to sell shares or make acquisitions, crimping securities firms’ profit.
Lehman, which reports results Tuesday before the market opens, probably earned $1.05 a share in the second quarter ended May 31, according to Thomson First Call’s analyst survey. That would be a 24 percent drop from last year’s second quarter for the fourth-biggest U.S. securities firm by capital, and the sixth consecutive drop.
Morgan Stanley and Bear Stearns announce earnings Wednesday.
Morgan Stanley is likely to report a 12 percent drop to 72 cents a share, analysts say, which would be the seventh straight decline for the second-biggest firm.
Bear Stearns, the only one of the six biggest brokerages to show an increase in profit in the first quarter, may repeat that feat. The sixth-biggest firm probably earned $1.20 a share last quarter, analysts say, a 1.7 percent rise from last year.
Goldman, the third-largest securities firm by capital, is likely to report earnings per share fell 6.6 percent from the year-earlier period to 99 cents, analysts say. For Goldman it would be the seventh consecutive drop as well.
Merrill, the biggest securities firm, reports second-quarter earnings in mid-July.
Paring Gains
Securities firms’ shares, which soared after the Sept. 11 terrorist attacks on optimism the economy and markets would rebound, have given up some of those gains.
Morgan Stanley has fallen 23 percent this year and is up 15 percent from its September low, while Goldman is down 22 percent in 2002 and is up 10 percent since Sept. 20.
Lehman is down 12 percent in 2002 and up 26 percent since bottoming after the attack. Bear Stearns has been the best performing stock of companies reporting earnings next week. It has fallen 0.1 percent in 2002 and is 35 percent higher since the post-attack low.
All of the above adds to the pressure to cut costs and may prompt another round of firings, some investors say.
“I’m sure there are heated debates inside the firms about what to do,” said Howard Ward, who owns shares of Goldman and Merrill in the $2.5 billion Gabelli Growth Fund.
Some CEOs don’t want to cut further because the bear market already is two years old, and business may recover in coming months, he said. Still, he said, some might have to say “there are enough reasons for this slowdown to last longer so we’ll keep cutting.”
Bloomberg News
