Wall Street may get temporary stay of execution

June 27, 2011

Wall Street is once again aflutter with talk of impending job cuts. But jittery traders may have a few months more grace before the knives come out. With trading revenue falling, the pressure is growing for investment banks to lay off staff. But executives are still debating whether the current slump is a blip. Nobody wants to slash ranks right before a turnaround. The summer could be safer than many think.

It has happened before. Morgan Stanley scaled back its fixed-income operations after the 2008 crisis, leaving an already-damaged franchise unprepared for the bailout-fueled market recovery the following year. The firm has since hired 400 or so people in interest rates and other more liquid markets, but has not yet made much progress toward its goal of increasing revenue by around a third to 8 percent of the top 10 players’ share.

Merrill Lynch also hit the panic button in 2008, perhaps more understandably given the tens of billions of dollars of losses its structured credit desks generated. But Tom Montag, who had just been hired from Goldman Sachs to run trading, extended the cull to the equities desks, too. The firm ended up trying to rehire scads of them months later, with varying success.

That was not the first time Merrill pulled the trigger too early on a cull. A decade ago then chief-executive-in-waiting Stan O’Neal cut thousands of staff soon after the Sept. 11 attacks. At the time the Thundering Herd was still trying to recover from its previous mass firing after the Russia and LTCM crisis in 1998.

No firm wants to repeat these mistakes. And the general feeling is that fixed income trading should recover; analysts at Nomura reckon it should grow by an average of 7 percent a year from here. The question is when. The current volatility caused by the European sovereign debt crisis, the U.S. debt ceiling impasse and concerns about the pace of economic recovery are taking their toll.

Deutsche Bank estimates trading volumes are down between 20 percent and 40 percent this quarter. That will bring a few firings, with more cuts coming for now from non-compensation expenses. But if the trading business hasn’t rebounded by September, Wall Street’s elevators will be full of staffers with cardboard boxes heading down and out for good.

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Years ago I knew a T-bill trader who said that, whatever Merrill Lynch does, do the opposite. They hire, you fire, that sort of thing. It was good advice and usually correct.

Posted by Elektrobahn | Report as abusive