Stars Crossed for Finance's Masters of Universe

Wall Street's revenues are drying up faster than it can fire bankers.
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Wall Street isn't canning its high-priced talent at the same pace that its revenues are drying up, and that spells trouble for firms that underwrite debt and equity deals and sell expensive advice on mergers and acquisitions.

Investment banks have been forced to tighten their belts amid a brutal decline in underwriting. The events of Sept. 11 only exacerbated the problem.

Goldman Sachs

(GS) - Get Report

, which as recently as last month said it planned no marquee job cuts, reportedly now plans to cut up to 400 positions in the next several weeks, including top-tier investment bankers. A spokeswoman for Goldman Sachs declined to comment on the reports.

Analysts weren't surprised by the news, which follows similar cuts at

Credit Suisse First Boston

and

Morgan Stanley

(MWD)

in the last two weeks. If anything, they say, the pace should be quicker.

"I'm not surprised, but I've been surprised you haven't seen more announced job cuts," said Robert Napoli, a securities analyst at ABN Amro. "The industry has only cut about 3% of jobs, and you're going to have to see more."

The industry has historically faced a quandary during market downturns because its talent is both high-priced and hard to replace. Revenues regularly evaporate in the securities industry because of market cycles, but cutting too quickly can leave firms vulnerable when markets rebound.

A compensation bubble afflicts CSFB, the investment banking unit of

Credit Suisse Group

(CSR)

, which hopes to eliminate $1 billion in costs by cutting 2,000 jobs, including 700 of its 3,800 investment bankers. Morgan Stanley, which recently sold its new midtown tower to

Lehman Brothers

(LEH)

for an undisclosed amount, is letting go of about 200 investment bankers, or 10% of its group.

Some back-of-the-envelope arithmetic sheds more light. According to Morgan Stanley's latest quarterly report, third-quarter investment banking revenue -- roughly, a sum of merger and acquisition fees and underwriting revenue -- totaled $777 million, down from $1.17 billion in the year-ago period. Dividing both figures by an estimated 2,000 investment bankers at the firm, each investment banker at the firm generated about $388,500 in revenue for the latest quarter, or about $1.3 million annualized, compared to about $582,900 of quarterly revenue for each banker in the same period last year. With yearly compensations regularly topping $1 million among top producers, something had to give.

"People have to gear up to the fact that revenues aren't coming back to 2000 levels anytime soon," said Reilly Tierney, an analyst at Fox-Pitt Kelton. Tierney noted that after the 1987 stock market crash, industry employment declined about 20% from peak to trough as investment banks carried out their firings. "You could be looking at a potential doubling or tripling in the number of job losses already announced," Tierney said.

Brokerage shares have been mixed since Sept. 11. Credit Suisse, which closed at $32.73 Wednesday, is down 3.7%, but Goldman Sachs, finishing at $80.71, has risen 16.3%. Morgan Stanley and

Merrill Lynch

(MER)

are up 19.1% and down 2.9%, respectively. Lehman has gained 8.4% since Sept. 11.

Crunch Time

The securities industry, whose businesses range from capital underwriting to trading commissions, generated $314 billion of revenue in 2000 in the U.S. and employed about 770,000 individuals. One-quarter of all jobs in the industry are located in New York, and there were 31 main offices and 30 broker-dealer branches in the World Trade Center alone.

A recent report by the Securities Industry Association estimates the attacks on Sept. 11 will result in a total third-quarter operating loss for the industry of $200 million, excluding relocation costs and other expenses covered by insurance, compared with a previous earnings forecast of $1 billion to $1.4 billion.

In September, equity underwriting fell 47.5% from August and 32.2% for the year to date. IPOs were essentially nonexistent in September, and fell 81% for the third quarter, the lowest quarterly total in 10 years. The SIA also estimates the industry will record earnings of $8 billion in 2001, down from $21 billion in 2000.

But Frank Fernandez, chief economist at the SIA, said the number of job losses ultimately won't be as high this time around compared with other big declines because firms hired judiciously during the 1990s. Wall Street's biggest players have been replacing more highly paid staff with younger and cheaper employees. And many firms, Fernandez said, are choosing to reduce bonuses rather than make deep cuts. The SIA estimates that bonuses this year could drop by 50% from last year's levels.

Ultimately, the market will decide what happens with hiring.

"I think the equity markets are going to trade sideways for a while," said Bill Quan, senior economist at Aubrey G. Lanston. "And if that's the case, more layoffs are forthcoming."