Reality comes to Wall Street and brings a closer look at costs. `Black Monday' hastens reviews of personnel, overhead expenses
Wall Street has had a golden touch during the last few years. Big deals, overseas expansion, high salaries, large profits, and unlimited resources seemingly promised the financial services industry growth and prosperity. Last year, the firms listed on the New York Stock Exchange produced $50 billion in revenues, keeping alive a 10-year growing trend. Last year, as well, more than $100 billion was raised in the stock market by selling new stock issues.
But these figures pale next to the $500 billion lost during October's ``Black Monday,'' the day the stock market plummeted 508 points and lost 22.6 percent of its value. The fall that put Earth back under people's feet has rudely shaken up the industry, some say. The Wall Street of the future will look different from the Wall Street before the plunge.
A combination of factors will shape the result, industry analysts and managers note. Investment firms and brokerage houses are counting heads and conducting strategic reviews. They are looking at salaries and compensation, which many say are ripe for review. Before the market fell, some people wondered how the ``yuppies'' would fare when a bear market came along and put their salary levels in line with reality - or put them out on the streets.
A third factor concerns areas where brokerage houses and investment bankers will channel their resources.
In some respects, the fall exacerbated a process already begun. Well before Oct. 19, third-quarter figures indicated a less than robust business climate, says one senior Wall Street official who asked not to be identified. ``There was a real feeling the market was moving sideways, and there wasn't much institutional or retail business,'' he says. ``Now the climate is demanding that people look at personnel and overhead.''
But not everyone agrees that the market's fall will materially change the industry. ``The trends were established before the market's fall,'' says Peter Solomon, vice-chairman of Shearson Lehman Brothers Inc. and co-chairman of its investment banking division.
What the fall will do is make some private firms seek larger public ownership, so that large amounts of capital will be available, Mr. Solomon says. ``We'll survive,'' he notes, ``but the capital available affects your ability to make markets and cover risks.''
Firms are eliminating or selling off departments and announcing freezes or cuts in staffing. On Monday PaineWebber Inc. sold its commercial paper operation to Citicorp, while Dean Witter Reynolds Inc. announced last week it was leaving the Eurobond business.
Salomon Brothers Inc. announced early last month that it was closing its municipal securities and commercial paper activities and letting 800 people go. Since then Kidder, Peabody & Co.; L.F. Rothschild Holdings; Shearson Lehman Brothers; and E.F. Hutton & Co. have announced layoffs. Even New York Mayor Edward Koch announced a hiring freeze last week.
A study from the WEFA Group, formerly Wharton Econometrics, found that 15 percent of New York City's jobs, or 160,000, were in the commodities and securities brokerages, says Mark Zandi, director of regional forecasting. This figure is more than one-third of the industry's jobs nationwide.
``We looked at what the downturns in the past have meant,'' says Mr. Zandi. ``This industry will take it on the chin, because without the fall, growth was expected to be sluggish. We now expect a net loss of 50,000 jobs throughout New York's economy by next year.''
Attrition will be the catalyst in reducing the work force, says Frank DeSantis, financial services analyst at Smith Barney, Harris Upham & Co.
``The amount of new hires is substantial in the past five years,'' says Mr. DeSantis. ``But I don't share the Draconian view that many people do: This isn't the end for the securities industry or the health of New York City. There won't be a mass exodus,'' he says.
With less demand for people in the business, salaries will be affected. The WEFA Group found that the average annual salary in the commodities and brokerage industry in New York City is $62,000, while the city's average for all jobs is $30,000.
As the industry becomes more competitive, costs have to decrease and compensation will decrease, says Nancy Young of Tucker, Anthony & R.L. Day in New York. She thinks that firms will increasingly use base salaries and that the average across-the-board salary will decline.
But DeSantis says salaries will not necessarily fall and their general structure will not change, but compensation, which includes bonuses or stock options, might fall. ``It's not unusual to make 100 percent of a salary in compensation,'' he says.
What should fall are the stratospheric salaries that younger, less experienced employees earned, says the Wall Street official: ``You won't see any more way-above-average compensation for mediocre talent.''
``Such high levels skew values. If you get paid that at a relatively young age, how motivated can you remain?'' he asks. ``There are many people who work hard and get paid for a good, solid job, but these are not the types who end up on a magazine cover.''
Given the prospect of losing people, management will try to keep the critical people and avoid defections, notes Samuel Hayes, a professor of investment banking at the Harvard Business School. ``Lower bonus payments can challenge the morale of firms, especially with the series of bonuses being high and rising,'' he says. ``You'll see a soft landing on lower compensation.''
Employment and salary cuts are only part of the restructuring the industry faces. Since brokers' commissions were deregulated in the United States in 1975, the average return on equity has been lower, says Ms. Young of Tucker Anthony. ``But this has been offset by expansion into new businesses,'' she notes.
Global markets have provided opportunity for expansion. Last year's ``Big Bang'' in London, when the markets were deregulated, offered hopes for overseas growth. It turned out to be more competitive and less profitable than expected.
``You have had a situation where the world economy was in great expansion. There was liquidity in the industry. You couldn't be a global securities firm without being in London and Tokyo,'' DeSantis says, adding, ``There was a certain tolerance for inefficient operations as long as companies made money.''
A firm also could not be a global player unless it was in all the major niches, according to conventional thinking, says Mr. Hayes of Harvard. Now some firms are focusing on higher-margin businesses, such as mergers and acquisitions, merchant banking, and arbitrage.
``I'm not sure it's going to be possible to bite off the top of the round,'' Hayes says. ``We haven't seen many examples of firms that have successfully found one niche, except perhaps Lazard Fr`eres & Co.,'' which is known for mergers and acquisitions.
Solomon of Shearson says that most firms will still be full-line, but the challenge is to avoid making sure they are not a mile wide and only an inch deep. ``I don't see any easy decisions, but I think it's glib to say you're getting out of a certain business,'' he says. ``You run against yourself if you do.''
Two types of investment banking firm will exist, Solomon adds: the small boutiques with one or two principals who will serve as the classic senior advisers, and the large entities with lots of capital, worldwide connections, and service capabilities.
``It's a matter of how much you have as well as how well you use it,'' says Young, because trading requires tremendous capital to cover losses.
``Not all that long ago the largest capitalized firm had $1 billion,'' she adds. ``Today, you see $3.5 billion. Most firms have recognized the importance of capital.''