The U.S. brokerage industry is far bigger than it needs to be.
October 7, 2002: 4:28 PM EDT
By Justin Lahart, CNN/Money Staff Writer
NEW YORK (CNN/Money) - For Wall Street, J.P. Morgan Chase could be just the beginning.
The big bank-cum-broker plans to fire up to 4,000 of its 20,000 employees worldwide, a source said Friday. That J.P. Morgan has been suffering is hardly a secret -- it's been hit by debt exposure to just about any of the past year's big blowups (Enron, Kmart, Global Crossing, Argentina, etc.) you could care to name.
But J.P. Morgan has an even bigger problem, and it's one shared by all its peers on Wall Street: The U.S. brokerage industry is far bigger than it needs to be. To survive, firms will need to cut back sharply -- and even then all of them might not make it.
"There are too many firms," said Prudential Securities analyst David Trone. "There needs to be some kind of shakeout."
Consider that staffing has been reduced by around 9 percent since the end of 2000, but activity in Wall Street's core businesses has fallen by much more (see chart).
The dollar amount on mergers and acquisitions globally -- an area where firms like Goldman Sachs and Morgan Stanley vie for fat advisory fees -- is running at 68 percent below where it was in 2000. U.S. initial public offerings are down 61 percent. Investment-grade corporate debt issuance is 26 percent below last year's pace.
The end result: "Revenues have plummeted faster than people costs," said CreditSights analyst Dave Hendler. "You just have too many smart people going after too little business. You don't need 12 hotshot bankers from 12 firms pitching the same deal to Procter & Gamble."
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Given that dynamic, it looks like big cuts are coming on Wall Street. While Merrill Lynch cut back sharply last year, other firms have mostly been cutting back their rolls in dribs and drabs. Some, like Goldman, have hardly cut at all.
The logic was that the M&A and IPO markets were just itching to come back, the highly-paid dealmakers would jump up from playing solitaire on their computers all day, and the cash would be rolling in. Some people even thought Merrill would be sorry it cut, because it would end up losing market share in the comeback. Turned out Merrill did the right thing. (Merrill denied Monday a Sunday Times report it plans another round of cuts.)
"Eventually firms are going to come around to the realization that the old days aren't coming back," said Brett Gallagher, head of U.S. equities at Julius Baer Investment Management. "This isn't a garden-variety downturn. It's the payback from the bubble."
More cuts could come quickly. A big piece of firms' compensation expenses are the bonuses they shell out at the end of the year. When Wall Street fires people, it tends to do it in the fall, before the bonus checks get inked.
Research analysts, particularly in the tech arena, seem a likely first step. Jeff Bronchick, chief investment officer at Reed Conner & Birdwell, points out that with regulators moving toward insisting that firms strictly separate their investment banking and research arms, analysts simply won't be earning their keep anymore.
"Either analysts pay is going to come down enormously," he said, "or they're going to be fired."
But even if Wall Street guts its research departments and fires a swath of its investment bankers, there may still be too many firms to go around. "Four or five years from now there will be four or five larger global firms that will be the last ones standing," said Bronchick. "The rest will be absorbed or consolidated." |
