Wednesday, June 29, 2011

Wall Street Wielding the Ax

Wall Street Wielding the Ax

By AARON LUCCHETTI And LIZ RAPPAPORT

The trading slump on Wall Street has battered profits and is about to cost some people their jobs.

Credit Suisse Group AG started laying off investment-banking employees Tuesday, and the cost-cutting push could claim 400 to 600 jobs, according to people familiar with the situation.

This month, Barclays PLC has eliminated 100 jobs in its investment bank, including some stock-trading employees. The latest cuts are on top of 600 layoffs in January, a person familiar with the situation said.

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Wes Duvall for The Wall Street Journal
.And at Goldman Sachs Group Inc., the annual survival-of-the-fittest culling of 5% of the securities firm's employees won't be enough in 2011, according to someone familiar with the New York company's plans.

Deeper cutbacks will be made throughout Goldman, this person said, especially in the U.S. Goldman still plans to add more employees in Singapore, Brazil and India.

"Banks are chopping a lot of wood, both deadwood and live wood," said Michael Karp, managing partner at executive-search and consulting firm Options Group.

The cutbacks are coming largely because of sluggish revenue growth on Wall Street's trading desks.

Regulators have clamped down on trading strategies that once generated huge profits but then backfired with staggering losses during the financial crisis.

Meanwhile, bread-and-butter trading clients from hedge-fund managers to mom-and-pop investors are doing less buying and selling, depriving firms of commissions and fees.

"There's definitely apprehension," said Roger Freeman, an analyst with Barclays Capital. On a recent visit with Goldman, Mr. Freeman discussed with executives how some hedge funds with small trading gains preferred to lock in those gains from earlier this year rather than risk losing them on new trades.‬‪

Howard Marks, chairman of Oaktree Capital Management LP, which manages more than $80 billion in assets for pension funds and other investors, told clients in a letter last month that "other people's increasingly aggressive behavior tells me to seek cover."

Lots of other investors are heading for the sidelines. Average daily trading on U.S. stock exchanges slipped in the second quarter to its lowest level since 2007's fourth quarter, according to Barclays Capital.

Average daily trading volume of 7.16 billion shares was down 31% from 2010's second quarter and 10% since this year's first quarter.

Corporate bond-trading volume has fallen 14% in the second quarter from a year earlier, according to the Federal Reserve. Currency trading at CME Group Inc. is down 11%, while U.S. stock-options volume slipped about 1% as of June 21, Barclays Capital said.

Also hurting is the lucrative and risky over-the-counter derivatives business, in which Wall Street firms used borrowed money to supersize bets. And fresh declines in mortgage-related securities are adding even more pain.

As a result, major Wall Street firms are projected to generate $180 billion in revenue for the first six months of 2011, according to FactSet. That would be a 10% decline from the first half of last year.

Wall Street's Slowdown

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..Full-year earnings at Goldman and Morgan Stanley are on pace to be less than half of their precrisis peaks. Analysts have cut second-quarter earnings estimates for financial firms with large trading operations, including Goldman, Morgan Stanley and Citigroup Inc.

For months, many firms have been hunkering down for the new lower-octane, lower-risk, lower-return environment that followed the crisis.

Bank of America Corp. and other firms have closed down proprietary-trading desks that made big bets with their company's capital but are endangered by last year's Dodd-Frank law, which eventually bans such trading desks.

Many Wall Street executives hoped to offset such problems by wringing more revenue out of client trading, asset management and other customer-focused businesses.

But the flow of money into stock mutual funds turned negative in recent weeks. Brokerage firms such as E*Trade Financial Corp. have noted slower trading activity among individual investors.

Average daily trading volume by E*Trade customers fell 3.7% between April and May. In another sign of caution, E*Trade customers had $26.5 billion in cash in their accounts in May, up 33% from last year.

Wall Street executives said job cuts are unavoidable, though they still are hoping for a trading rebound.

At Credit Suisse, which has about 20,000 employees in its global investment bank, the cuts are expected to target slower-expanding businesses and underperformers.

"We continue to be proactive about monitoring the size of our business relative to client opportunities and market conditions," a Credit Suisse spokeswoman said in a statement. "This involves…adjusting capacity to meet client needs and to manage costs across the business."

Morgan Stanley recently indicated that it might let the number of brokers at its Morgan Stanley Smith Barney joint venture slip below 17,500. That is the low end of its previous target range.

Goldman plans to cut about $1 billion in expenses by mid-2012. That would represent a 10% reduction in noncompensation costs, targeting everything from car services to business meals and stationery, said a person familiar with the matter.

Citigroup, which hasn't announced broad layoffs, recently let go one of its co-heads on the commercial-paper desk, Matt Taormina. Mr. Taormina declined to comment.

The move came because Citigroup realized it didn't need two senior employees to lead the group, even though the bank has one of the largest commercial-paper desks on Wall Street, said a person familiar with the matter.

Pay consultants expect bonuses to tumble if revenue doesn't pick up steam the rest of the year. That likely would mean trouble for parts of the New York economy that rely on big spenders.

In New York's residential real-estate market, "we've seen some tailing off, but the market has performed better than 2009 and 2010," said Donna Olshan, president of Olshan Realty in New York.

According to the firm, 17 residential real-estate contracts for properties exceeding $4 million were signed in New York last week, down from 22 the previous week.

In Manhattan's Tribeca neighborhood, a new Maserati dealership set a monthly record with 23 sales of the Italian luxury car in April. Sales have slipped to about 15 cars so far this month, said Peter Lehmann, a sales consultant at the dealership.

Write to Aaron Lucchetti at aaron.lucchetti@wsj.com and Liz Rappaport at liz.rappaport@wsj.com

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