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With Merrill Cuts, the Street Getting Close to Bone

But the industry has good reason to hope the latest round of layoffs is one of the last.

The latest bloodletting at

Merrill Lynch

(MER)

caps a year in which the heretofore expansionary securities industry slashed 4% of its workforce.

While it probably isn't the last time Wall Street will hear of job cuts this year, the pace of layoffs should slow significantly in 2002, analysts said. The securities industry handed out more than 28,000 pink slips in 2001 to make up for plunging trading and underwriting revenues. But business began to firm in the fourth quarter, and the sweeping head count reductions of last year are probably over with.

George Graff, Vice President and investment officer at Northbrook Bank, predicted net hirings as soon as mid-2002, if the IPO market revives and corporate investment picks up, giving a boost to underwriting.

To the Quick

There's a compelling reason for Wall Street to hope the worst is over. Securities companies have for the most part tried to hold onto their brokerage staffs, preferring to cut administrative employees for fear that when a recovery comes, they'll need salespersons more than accountants and support staff.

Reilly Tierney, an analyst at Fox-Pitt Kelton, said that if a recovery doesn't materialize, brokers and their associated revenues become vulnerable -- something the firms are hoping to avoid.

"You usually focus your cuts on the back-office guys that don't bring in revenues. But if you have to look hard and cut another level, it'll probably be the retail-broker producers. They're great in a bull market, but don't look so good in a bear market," Tierney said.

Although the cuts taken to date have been painful, by and large they don't heavily accrue to the bottom line, since they come with large severance costs, said Mark Constant, Lehman Brothers analyst.

"Far and away the biggest factor in expense management is variable compensation, not fixed costs related to head count," said Constant. Bonuses were slated to fall 30% in 2001, and some firms have said they won't think about raises until the second half of this year.

Employment in the U.S. securities industry peaked at 776,400 in February of last year, but fell to 748,300 in October. The Securities Industry Association estimates that another 9,000 to 12,000 workers will be cut in coming months, as already announced cuts get implemented.

By comparison, the head count in the securities industry plunged 9.1% after the stock market crash of 1987. Between December 1987 and February 1991, the number of people employed by U.S. securities firms fell to 414,600 from 456,300. Employment didn't reach 1987 levels again until 1992.

The difference today is that industry profits are close to 10 times what they were in 1987.

Rough Year

Merrill disclosed 9,000 jobs cuts, the majority of which were dispensed with during 2001, bringing total layoffs at the company for last year to around 21% of its workforce.

Part of a larger cost-cutting program, Merrill's layoffs resulted in a pretax severance charge of about $1.2 billion. Merrill's stock rose in a down market Wednesday, finishing up $1.55, or 2.7% to $57.99. The American Stock Exchange Broker/Dealer Index was also higher, up 1%, on hopes the worst was over.

"As long as the economy does not deteriorate significantly from expectations, we should see some more pruning, but not wholesale bloodbaths," said Tierney. Most securities firms cut jobs aggressively in 2001 with the expectation that 2002 wouldn't bring any big recovery, he said.

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But some kind of recovery would be welcome. Based on a recent uptick in business, the Securities Industry Association expects profits to turn around as early as the second or third quarter of next year and is forecasting net income for the year will rise to $11 billion from around $10 billion in 2001.

Those forecasts are based on an improvement in business over the past several months as the stock market surged from its Sept. 21 lows. The

Nasdaq Composite Index has popped 44%, the

Dow Jones Industrial Average has jumped 23%, and the

S&P 500 has climbed 20%.

Varied Fortunes

Some firms could be more vulnerable than others.

Lehman Brothers

(LEH)

has been virtually layoff-free this year, while

Goldman Sachs

(GS) - Get Report

has balanced layoffs with new hires in areas of the business that it's growing, keeping total headcount flat.

"The general trend in employment remains up for some of the more significant companies. They won't be very active in layoffs unless the market takes an unpredictable turn down. But that's possible given the pitch of the rally in the last three months. There could be another nerve wracking downturn causing a shock to investor confidence," said Tierney.

Tierney voted

Morgan Stanley

(MWD)

most likely to announce more layoffs this year, because the company's earnings have fallen more dramatically than its workforce has been cut. Morgan Stanley posted a profit decline for the fifth-consecutive quarter in December. The company's earnings dropped 28% in the fiscal fourth quarter vs. a year ago to $870 million.

European banks also are prime candidates, he says. "We should see some trickling from the weaker players, particularly European banks. I would expect London to play catch-up with New York in 2002."