Shearson Is Latest to Retrench
WALL STREET'S WOES
WALL Street's troubles are not over. Since the stock market crash of October 1987, thousands of professionals have lost jobs. Some investment houses have folded or merged. Individual investors have fled the market. And firms once thought immune to the market's woes now find themselves in difficulty. The latest casualty is Shearson Lehman Hutton, the nation's second-largest securities firm. This week American Express Company announced that it would acquire the 30 percent of Shearson common stock that it does not already control.
But that buyout, involving an exchange of stock, follows an unsuccessful effort by American Express to reduce its stake. Shearson has shared in the general downturn affecting Wall Street. For the immediate period, Shearson is expected to exert a downward tug on American Express earnings.
Shearson's difficulties follow by several weeks the Chapter 11 bankruptcy filing by Drexel Burnham Lambert Group Inc., the driving force behind the $200 billion junk bond market. And earlier this week Kidder, Peabody Group Inc., owned by General Electric Company, announced a $23 million loss for 1989.
Longtime market observer Perrin Long Jr. says that he can think of no comparable period of retrenchment on Wall Street - at least in the post-war period. ``There were major difficulties for some houses in 1973 and 1974, which led to mergers and consolidations in the late 1970s,'' says Mr. Long, who is with Lipper Analytical Securities Inc. ``But that was nothing like what is happening now.''
Since last fall Wall Street has lost some 6,000 jobs. Another 19,000 jobs were lost between the market crash of October 1987 and late 1989 (see graph).
Repercussions are expected during the period ahead:
Major public corporations such as American Express, Sears (which controls Dean Witter Reynolds), and GE, which had been eager to own investment houses, are increasingly disenchanted. Some are now expected to get out of the business, although, as the Amex-Shearson link indicates, that is not easy when the bears come to market.
Some analysts believe that it might be beneficial if brokerage firms passed from corporate ownership back to the control of general partners, as was the case several decades ago. General partners bear greater legal liability, which means more accountability to the public, says Long.
Additional layoffs can be expected. Shearson will lay off 2,000 of its 35,500 employees by April.
More local brokerage offices - those adding little revenue or earnings to the investment houses - will be closed. Shearson will close 50 of its 600 retail branches.
``The small investor has been a less important force in the investment industry,'' says Marshall Blume, a professor of finance at the University of Pennsylvania's Wharton School. ``Many of these smaller retail offices tend to sell their products to individuals.'' Retail offices also lost important business when the Tax Reform Act of 1986 closed several tax loopholes, says Dr. Blume, since ``many smaller offices sold a large amount of tax shelters.''
``Wall Street has always been cyclical,'' says David Strongin, an associate with the Securities Industry Association (SIA). ``The 1980s were years of enormous growth for the industry.''
Mr. Strongin believes the current period of consolidation represents a ``breather'' for Wall Street - and that the industry will eventually expand. But now, he says, it would be a mistake to overlook the impact on local retail brokerage offices of the current economic slowdown in the US. The securities industry mirrors the direction of the overall economy, he argues.
The industry woes are also affecting colleges, says Blume. Fewer students now seek MBAs. Still, he says, outstanding graduates are able to command high starting salaries, because the investment houses recognize their need for new talent. But whereas graduates used to have ``six or seven job options, they now have only two or three,'' laughs Blume.