What Really Has Wall Street Worried
Charles Stevenson, president of hedge fund Navigator Group, heads the co-op board at 740 Park Ave., home to Blackstone Chairman Stephen Schwarzman and oilman David Koch. While the Upper East Side building was picketed by Occupy Wall Street in early October, Stevenson, 64, is less disturbed by the protesters than by the problems plaguing his industry. “I don’t think it’s a time to make money—this is a time to rig for survival,” he says. “The future is not going to be like a past we knew. There’s no exit from this morass.”
Euphoria swept Wall Street in 2009 as it rebounded to record profits after the credit crisis. Now the benefits of a $700 billion taxpayer bailout and $1.2 trillion in emergency funding from the Federal Reserve have faded. An anemic global economy, the European sovereign debt crisis, U.S. unemployment stuck above 9 percent, and swooning stock markets have darkened the mood on Wall Street, where bankers worry the troubles may not end for years.
On Oct. 18, Goldman Sachs reported that it lost $393 million in the third quarter, excluding dividends for preferred shareholders, after the value of some investments fell and revenue declined in trading, asset management, and securities underwriting. Michael Karp, chief executive officer of New York recruitment firm Options Group, says Wall Street pay will fall 30 percent this year, and more for executives. It will be flat or down even in businesses doing relatively well, such as emerging markets and commodities, he adds.
Karp says he met last month over tea at the Gramercy Park Hotel in New York with a trader who made $500,000 last year at one of the six largest U.S. banks. The trader, a 27-year-old Ivy League graduate, complained that he has worked harder this year and will be paid less. The headhunter told him to stay put and collect his bonus. “This is very demoralizing to people,” Karp says, “especially young guys who have gone to college and wanted to come onto the Street, having dreams of becoming millionaires.”
New rules from the Basel Committee on Banking Supervision, taking effect starting in 2013, will more than double capital requirements for banks, cutting into profitability. To reduce their vulnerability to market swings, banks including Goldman Sachs and UBS have cut leverage by more than half, meaning they are using less borrowed money to boost trading profits.
“Sharply” falling earnings will lead to almost 10,000 financial-services job cuts in New York City by the end of 2012, according to an Oct. 11 report by New York State Comptroller Thomas P. DiNapoli. The biggest global banks already had been cutting jobs at the fastest rate since 2008 when Bank of America said last month that it will eliminate 30,000 positions. London-based HSBC, Europe’s largest lender, aims to shed the same amount. UBS, Switzerland’s biggest bank, is shrinking after a $2.3 billion trading loss disclosed in September.
While there had been “an understandable path” out of the turmoil of 2008, says Frederick Lane, vice-chairman of investment banking at Raymond James Financial, the current slump may be long-lasting. “There’s going to be some disillusionment, similar to physicians,” says Lane. “The notion that somehow going to medical school would deliver you substantial wealth and prestige is no longer true.”
Not everyone is worried about bankers. “I wouldn’t shed too many tears for Wall Street,” says Neil Barofsky, the former special inspector general for the Troubled Asset Relief Program who is now teaching a class on the financial crisis at New York University School of Law. “The systemic advantage that the too-big-to-fail banks enjoyed in the lead-up to the financial crisis may be diminished in the near term,” he says, “but the structure is still essentially the same and will almost certainly help catapult them to record profits and bonuses once the good times return.”
In Manhattan’s Zuccotti Park, Occupy Wall Street’s protests against bank bailouts and income inequality have gained support from Nobel Prize-winning economists Joseph Stiglitz and Paul Krugman. “We have too many regulations stopping democracy and not enough regulations stopping Wall Street from misbehaving,” Stiglitz, an economics professor at Columbia University, told protesters on Oct. 2. “We are bearing the cost of their misdeeds. There’s a system where we’ve socialized losses and privatized gains. That’s not capitalism.”
Large financial institutions have been “exceedingly aggressive at trying to roll back reform” and have largely succeeded, says hedge fund manager David Einhorn, president of Greenlight Capital.
Billionaire private equity investor Wilbur Ross, 73, has been around long enough to see banks bounce back from other slumps. He says Wall Street’s “inherent ingenuity” shouldn’t be discounted. “The history of the investment community,” he says, “shows that it will find ways to profiteer.”