How Deep Will Wall Street Cut?

Investment banks didn't bulk up their ranks after the last bust, so this round of layoffs may not be too brutal

Wall Street firms have declared: Let the layoffs begin. But how deep will the cuts go?

The bloodletting on the Street has been particularly gruesome in past downturns. Investment banks and securities firms laid off nearly 90,000 people in the two years after the dot-com bubble burst in 2000, according to the Securities Industry & Financial Markets Assn. And there are plenty of vulnerable jobs in the current environment—for example, those of Bear Stearns' (BSC) 14,000 employees once it is swallowed up by JPMorgan Chase (JPM).

But the extent of these layoffs may not match the scary numbers from crunches past. For starters, the industry never ramped up significantly after the dot-com debacle, only recouping 74% of the jobs it lost during the bust. Says Tig Gilliam, CEO of Adecco Group North America, a staffing firm: "They were aggressive in cutting, but not in replacing."

Not "Thousands and Thousands"

Over the past nine months, Wall Street has announced plans to slash 34,000 positions. Analysts expect the toll will rise to between 15,000 and 30,000 by the end of the year. But unlike in past busts, the losses won't necessarily be across the board. Instead, most will probably come from areas at the center of the credit crisis, including structured finance and debt trading. Merrill Lynch (MER) has reported that it will be selective about the 650 jobs it eliminates: "This is not a case where we're targeting thousands and thousands of people," CEO John Thain said in a recent conference call.

What's worrisome, though, is that companies may have to cut into the meat of their operations. In the dot-com downturn, financial-services firms largely targeted administrative positions, call-center employees, accountants, and other so-called back-office staff for layoffs. With improvements in technology, many of those positions have been eliminated permanently, helping to keep a lid on costs and head counts in recent years.

Since those ranks remain relatively thin, firms now may have to whack analysts, traders, and dealmakers. That's not good for the island of Manhattan, where many of these high-paid employees work; banks and brokerages account for 35% of the city's wages. Says Moody's economist Marisa DiNatale: "There is not a lot of fat to cut."

    Before it's here, it's on the Bloomberg Terminal.