Wall Street Profit May Drop 37% Bitten by Laws, Congress

Wall Street’s profit may fall 37 percent this year, hurt during the second half by rising interest rates, legal costs and budget turmoil in Washington, New York State Comptroller Thomas DiNapoli said.

DiNapoli forecast securities industry earnings at $15 billion in 2013 compared with $23.9 billion the year before, while employment has fallen near a post-recession low, in a report released today. A drop in profit may crimp bonuses, which reached an estimated $20 billion for 2012, he said.

“The political gridlock in Washington may take a bite out of the securities industry’s profits for the fourth quarter,” DiNapoli, 59, said in a statement. “Washington’s inability to resolve budget and fiscal issues is bad for business.”

An impasse over spending and raising the nation’s borrowing limit led to a partial shutdown of U.S. government operations this month, as Republicans in Congress fought with Democrats over paring back Obamacare. The resulting turmoil rocked equities and pushed prices higher in the $4.1 trillion market for federal debt. That may lower earnings in the securities industry, which helps drive the city’s economy, DiNapoli said.

“Failure to resolve the federal budget and debt ceiling impasse could disrupt the economy and hurt New York City and New York state,” said DiNapoli, a Democrat. Congress put off both issues with short-term fixes setting new deadlines next year.

Economic Tax

“The impasse in Washington over the last several weeks was an unfortunate tax on the economy,” Ruth Porat, chief financial officer at New York-based Morgan Stanley, said on an Oct. 18 conference call with securities analysts. She said the end of the logjam, reached late Oct. 16, would restore growth and “broader market activity” to the pace both had reached before the shutdown that began Oct. 1.

Whether Congress would raise the U.S. debt ceiling or let the nation default “has become a concern for our clients,” Harvey Schwartz, New York-based Goldman Sachs Group Inc.’s CFO, said Oct. 17 on a conference call. He said the resulting uncertain outlook “has weighed heavily on market sentiment”

Also an issue this year are legal expenses such as a proposed $13 billion settlement from New York-based JPMorgan Chase & Co. to end federal probes of its mortgage-bond sales. On Oct. 11, the biggest U.S. bank reported a loss, its first under Chief Executive Officer Jamie Dimon, after a $7.2 billion charge to cover rising costs tied to litigation and regulatory probes.

Trading Slump

Citigroup Inc., the third-biggest U.S. bank and also based in New York, reported third-quarter profit that missed analysts’ estimates as bond trading slumped and U.S. mortgage revenue fell as interest rates rose during the three months ending Sept. 30.

The industry’s earnings in 2012 were the third-highest since 1995, and higher than any year before the economic crisis, DiNapoli said. The profits helped push bonuses up by 8 percent, he estimated in a February report.

Employment has tumbled on Wall Street. The number of jobs, at 163,400, remained more than 13 percent lower than before the financial crisis, DiNapoli said today. Growth that followed the end of the recession in 2009 halted in the second half of 2011, according to his report.

The average salary for workers in the securities industry reached about $361,000 last year, compared with about $69,000 for the city’s 3.4 million nongovernment jobs, the report shows. Total wages paid by securities firms fell 2.4 percent to $59.3 billion in 2012, yet still accounted for almost 22 percent of all pay received by nongovernment employees in the city.

Tax Revenue

Taxes on the securities industry and its workers delivered $10.3 billion to state coffers, or almost 16 percent of all state revenue, the report showed. That was up slightly from fiscal 2012. New York City collected about $3.8 billion from levies on the businesses and their employees, up almost 27 percent from 2012 and amounting to 8.5 percent of all receipts.

DiNapoli said he expects state collections from the industry to be much higher in fiscal 2014, because taxpayers shifted their earnings to 2012 to avoid federal tax increases that took effect this year.

If earnings reach DiNapoli’s projection for this year, that will top the $13.4 billion forecast in the city’s four-year financial plan, even while falling from 2012, according to the report. DiNapoli said he expects the industry will continue to streamline as it adapts to changes in regulation and markets.

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