Wall Street: More Heads Will Roll

Investment banks aren't done shrinking their payrolls

Not us. That's how Goldman Sachs Group Inc. reacted a year ago to any suggestion it might join its rivals and slim down.

Now, Goldman has changed its tune. On Mar. 19, the firm disclosed it axed 541 employees in the first quarter. And Chief Financial Officer David A. Viniar told investors Goldman plans to keep pruning staff "modestly" by a percentage in the "mid-single digits" through year-end. If Goldman cuts by 5%, that translates into 1,134 lost jobs.

Goldman's change of heart is the latest sign that Wall Street is quietly setting in motion another round of brutal layoffs. So far, Credit Suisse First Boston CEO John J. Mack is the only executive to admit publicly that his investment bank is still overstaffed. In 2001, he noted, Wall Street's investment banking business had receded to its 1998 level. "As an industry, we're not going to need all [the] capacity [we have]," said Mack, announcing the bank's fourth-quarter results on Mar. 12. Bear Stearns Cos., Lehman Brothers Inc., and others downplay cuts. But all acknowledge that it will be years before mergers and equity issues return to their 1999 zenith.

Analysts expect brokerages could let go as much as 10% of their staff this year, after cutting 15% in 2001. The investment banks recognize "that even if things get better, they'll never get back to where they [were]. They will get down to 1999 staffing levels," says Alan Johnson, head of compensation consulting firm Johnson Associates.

The reductions could be much more painful than most investment banks are letting on. BusinessWeek asked Putnam Lovell Securities Inc. to calculate how many employees six of Wall Street's top investment banks would have to let go if they rolled back to their 1999 staffing levels. Putnam Lovell's computations show that if that happens, banks would have to shrink their payrolls by 5%. More than 13,000 employees would lose their jobs, bringing their total staff to about 235,000.

Even that estimate could be understating the full impact of the dearth of business on Wall Street. The job loss tally could be as high as 23,500. Already, Merrill Lynch & Co. has cut so many people that it's well below its 1999 staffing level. To get back there, it would have to hire 10,500 people--something that CEO-in-waiting Stan O'Neal is unlikely to do after setting the pace as the Street's most aggressive cost-cutter.

Some analysts expect investment banks' revenues could slump another 5% this year. If that happens, simply rolling back to 1999 staffing levels won't restore the banks' profitability because each employee generates less revenue now than three years back. To regain 1999 productivity levels, they would have to give pink slips to 7% of their staff.

That's a real possibility: So far this year, companies have announced $177 billion worth of mergers and acquisitions--71% less than the $622 billion in the same period in 1999, according to Thomson Financial. So much for an economic recovery on Wall Street.

By Emily Thornton in New York

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