Wall Street's woes just got worse. Although Lehman Brothers Inc. (LEH ) is still hiring, other investment banks are handing out pink slips to prop up increasingly depressed bottom lines.
Since the start of the year, brokerages have quietly shed about 5% of payrolls that soared to a record 772,200 in 2000, up 150,000 from two years earlier. The paychecks were huge: the New York Stock Exchange's broker-dealer members racked up record expenses--much of it for salaries--of $58 billion, on $61.4 billion of revenues in the last quarter of 2000.
So far, so bad. But then a shock announcement on June 26 by Merrill Lynch & Co. (MER ) opened the distinct possibility that Wall Street's bloodletting could get far worse. America's No. 1 retail brokerage warned that second-quarter earnings, due to be released the week of July 16, will be as much as 37% below analysts' consensus expectations because of sluggish trading and a listless stock market. Analysts immediately cut their earnings estimate for Merrill to 54 cents per share, a 47% drop year over year, according to First Call Corp. If trading volumes remain depressed, "the selective layoffs so far may be less aggressive than needed," says Richard K. Strauss, securities industry analyst at Goldman, Sachs & Co.
By yearend, compensation consultants believe, the toll could reach 15% of Wall Street's jobs. Although investment banks are camouflaging the damage by announcing staff cuts in dribs and drabs, "there's a lot more to come," says Alan Johnson, managing director at employment consultancy Johnson Associates.
In private, some senior bankers admit they don't expect a rebound until 2002 at the earliest. Analysts are slashing earnings estimates for brokerages across the board because they believe many have not hit bottom as depressed trading volumes and market volatility continued in June. But a far bigger problem is that brokers are still plagued by a thin list of mergers, especially since European regulators nixed General Electric Co.'s (GE ) $45 billion takeover of Honeywell International Inc. (HON )
CLIPPED WINGS. New issues aren't helping either. While global debt and equity offerings were up 25% in the first half of the year, proceeds from initial public offerings plummeted 42%, according to Thomson Financial Securities Data. Worse, investors are becoming disillusioned with the big-name corporate spin-offs such as Philip Morris' (MO ) food and beverage company Kraft Foods and Lucent's optical-component-making unit Agere Systems. Such offerings were among the few that banks thought might fly in a turbulent market. But IPOs are far from the sweet deals they once were. Though first-day gains are still common, the average IPOs this year are down 20%, estimates Goldman Sachs.
Discouraged investors are keeping their pocket books zipped up. And that is putting more Wall Street jobs on the line.
By Emily Thornton in New York