Goldman Sachs’ annual layoffs will reportedly be worse than usual, JP Morgan announced that it’s cutting 4,000 jobs, and already Morgan Stanley has let go 1,600 employees.
The financial crisis hit five years ago, and while the U.S. has gotten to the point where it’s adding jobs at a slow and steady pace, the global financial sector continues to add and shed jobs in fits and starts. According to the New York Office of the Comptroller, New York’s securities industry lost 28,300 jobs during the financial crisis, and has only gained back around 8,000.
It’s important to understand why.
Wall Street’s problem is a business model problem. The changes the industry was forced to undergo due to the financial crisis have done away with the revenue streams that it depended on before. Regulations are tougher and the market is rougher. Think of these years of transition period. Wall Street is figuring out what it will be and how its business will work.
Wall Street Employment since 2007
For one thing, proprietary trading — in which a firm trades for its own direct gain — has been banned by the Volcker Rule. This was Washington’s reaction to lurid stories of banks creating toxic investment vehicles designed to take money from their clients. What it means for the business, is that firms are not only missing prop trading revenue, but they’re also letting go of the traders and support staff that used to execute those trades.
Then there are cash requirements. Both domestic and international regulations require banks to hold more capital in the event of a doomsday scenario. Firms haven’t been shy about raising cash to meet these standards, and that means selling off assets and cutting costs like compensation.
Plus, Wall Street is still putting away money for lawsuits stemming from the financial crisis.
“This is going to be an endless beatdown for the banks in terms of legal claims,” said famed bank analyst Meredith Whitney last year.
Meanwhile, the parts of Wall Street’s business that new rules have left untouched are still struggling to generate the revenue they once did. In terms of stocks, it was only last month that the S&P 500 reached 1500 for the first time since 2007.
Bonds aren’t the money-makers they once were either. The Federal Reserve’s policy of keeping interest rates low means that yields are lower across the board. As a result, banks are cutting their fixed income teams. In an effort to refocus their business model, UBS got rid of its team all-together, causing a loss of 10,000 jobs.
Add to all of that the fact that the market has been incredibly choppy over the last few years. The year can start off well, and then take a dramatic turn. When things in Europe seem to stabilize, another crisis hits. Just when you think Washington has figured worked out a deal, a new (fiscal) cliff looms. That’s why, according to the New York Comptroller’s Office, Wall Street had about 1,000 more jobs in December 2011 than it did in December 2012.
The doomsayers have not changed their tune. In July, Whitney said that Wall Street could lose as many as 50,000 jobs before all is said and done. By her estimation, even this new skeleton of what the Street once was is not a profitable business.
“You can make great money in a utility type of business by borrowing cheaply and lending sensibly but that’s not what’s being done. The basic bank model has, is, and will be attractive. It’s just you’re combining everything and undercutting pricing in one place and trying to make up for it, effectively having loss leading businesses… it’s not a business that works.”
Every year intern and analyst class sizes are rethought and mostly shrunk — the perks and expense write-offs are on the outs, but these are small things. They don’t do what really has to be done. They don’t change the entire way Wall Street does business. Until that’s done, this long anxious period will continue.