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Carnage Beckons on Wall St.

Mark DeCambre

Fretting about bonus money is Wall Street's latest fixation, but investment bankers may soon have more pressing worries.

September could bring a wave of layoffs as big banks aim to bounce back from the summer's credit market swoon. Mass firings now could help brokerage firms cut costs and show investors they're taking decisive action to compete better in a tough market.

It also may have dawned on banking honchos that cutting staff will help preserve whatever's left of their dwindling bonus pools.

"I think [bank execs] are thinking, if I cut right now maybe I save some of this bonus," a senior executive at a Wall Street firm tells TheStreet.com.

The layoffs have begun, though so far they have been mostly confined to the investment bank mortgage desks that were so instrumental in this summer's subprime tsunami.

Wall Street's willingness to repackage bad loans into opaque, bondlike instruments has sent investors scampering for the safety of Treasury debt, leading to the collapse of demand for mortgage-backed securities.

This week alone, Lehman Brothers (LEH Quote) fired 1,200 workers and Bear Stearns (BSC Quote) laid off some 240. UBS(UBS Quote) is said to be considering layoffs because of a drop off in trading revenue, though a spokesman says no announcement of job cuts has been made.

But observers expect the mortgage business cutbacks are only the beginning, and that many firms will wield the ax with authority.

Financial stocks have been battered and bruised over the past few weeks. Given the poor conditions prevailing in the credit markets, layoffs may be the only method available to senior executives eager to salvage something out of what is likely to be a very unattractive second-half performance.

The senior executive speculates that September serves as an ideal time for a bloodbath because banks would rather pay out severance than let workers lay full claim to the precious bonus pool.

Outsized bonuses have become the normal course of business in recent years, on the back of mega deal flow. But the credit markets are still seized up, and something in the order of $300 billion in leveraged loans remains on the balance sheets of banks.

The hope, for now, is that investors will finally take an interest in many of those loans when summer ends.

"People are gonna wake up on Labor Day with high expectations," the official says.

In the best case scenario, investment banks will be able to sell the loans at 95 cents on the dollar or better. But selling at anything short of par (i.e., 100 cents on the dollar) means that banks have to absorb losses that eventually trickle down to the officials who underwrote the deals -- and beyond.

Beyond boosting their share prices, layoffs also could help executives say they're ready to make a fresh start for 2008. How readily investors will accept this claim remains to be seen.

Then again, try telling that to former Bear Stearns honcho Warren Spector.