Wall Street Journal - 09/22/98
By PATRICK MCGEEHAN and ANITA RAGHAVAN Staff Reporters of THE WALL STREET JOURNAL
NEW YORK -- Saddled with huge trading losses and a dearth of stock and bond deals, Wall Street securities firms are poised to post their worst quarterly results since the fourth quarter of 1994.
And that prospect already has some major firms, including Merrill Lynch & Co., the nation's biggest brokerage firm, and Travelers Group Inc.'s Salomon Smith Barney unit considering layoffs.
"The swiftness and amplitude of the decline has really put the industry on notice," said Dean Eberling, an analyst at Putnam, Lovell, de Guardiola & Thornton, a New York investment-banking boutique. "This is the wake-up call to remind people that ... this business is cyclical."
Added Ed Orchant, an employment consultant with A-L Associates: "People are starting to worry for the first time in a long time about their jobs."
Merrill Lynch is expected to announce the elimination of at least 500 jobs, mainly in its investment-banking and trading operations, people familiar with those businesses said. A Merrill Lynch spokesman last week said that "no final decisions have been made regarding layoffs anywhere in the firm."
Salomon Smith Barney is also expected to trim its payroll by hundreds of workers, cutting at least 5% of its employees in some departments, particularly in its capital-markets and trading businesses which have been hardest hit by the sell-off in global stock and bond markets, say people at Salomon Smith Barney.
Salomon Smith Barney Outlook
These people declined to specify the actual number of job losses. They did say, however, that the cutbacks wouldn't be anywhere near 5% of Salomon Smith Barney's total work force of 35,000. That's because
Salomon's 10,600 brokers and its technology support staff are likely to be spared from any cost-cutting moves. Salomon employs about 4,500 people in stock-and-bond capital markets and investment banking, and this is where the cuts will be concentrated.
A Salomon spokesman declined to confirm the layoffs.
Wall Street's rush to retrench comes as the nation's brokerage firms are expected to post their worst showing since the fourth quarter of 1994 when they reported an after-tax loss of $136 million. Ever since mid-1995, the securities industry's quarterly after-tax profit has consistently topped $1 billion, reaching a record $2.3 billion in
the second quarter of 1998.
By contrast, while analysts say it is unclear if the third quarter will result in a loss for the industry, a sharp drop in profits is inevitable. "By some measures, this will be the worst quarter that we have seen in the 1990s," said Sallie Krawcheck, an analyst at Sanford C. Bernstein & Co.
Poor Showing in 1994
Ms. Krawcheck said the securities industry's poor showing in 1994 was heavily skewed by a couple of firms, such as the former Salomon Brothers Inc., which posted large losses. "What is striking about this quarter compared to other quarters is that there will be trading hits sustained by all the major securities firms," she said.
To be sure, some firms such as Morgan Stanley Dean Witter & Co.; Goldman, Sachs & Co.; and Lehman Brothers Holdings Inc. may have better quarters than their peers because they operate on a fiscal year that ends in November. As a result, these firms enjoyed two reasonably profitable months, June and July, before markets headed sharply lower in August.
Many investment-banking firms, including Merrill, Morgan Stanley, Salomon and Lehman Brothers, have already warned investors of potential profit shortfalls in preannouncements in recent weeks. In anticipation of these earnings shortfalls, many brokerage-industry stocks have fallen sharply from their midsummer peaks. Merrill, for example, is off 51% from its 52-week high. Morgan Stanley Dean Witter is down 45% and PaineWebber Group Inc. is off 38%. Lehman Brothers has fallen a steep 60%.
Slowest Weeks of 1998
The past three weeks were the slowest of the year for investment-banking firms. Just $14.2 billion was raised last week in the capital markets, about a third of the amount raised in a typical week in the first half of 1998, according to Securities Data Co., a Newark, N.J., firm that tracks corporate-finance activity.
"If this keeps up, they will be doing a little of everything at all Wall Street firms," said Mr. Orchant of A-L Associates. "Hiring will be frozen, there will be layoffs and bonuses will be cut." Those cuts may come as a shock to many young investment bankers who weren't around six years ago, the last time there was an across-the-board decline in compensation on Wall Street, Mr. Orchant says.
Until the end of August, Wall Street executives were looking to offset falling revenue by paring "discretionary" expenses, Mr. Eberling said. "The last three weeks has intensified the effort to cut costs," he said. "Increasingly, the focus has shifted more toward looking at businesses and making judgments about whether to be in them or get out."
And as Wall Street exits businesses, analysts say the bankers and traders who inevitably will lose their jobs won't have as easy a time getting relocated. "I don't think you will see the rapid absorption of professionals that we have seen over the last four years," said Joan Zimmerman, an executive recruiter at New York-based GZ Stephens Inc. The reason? "You are looking at managements that are much more cautious," she said. |
