Wall Street plans to get smaller this summer. Faced with weak markets and uncertainty over regulations, many of the biggest firms are preparing for deep cuts in jobs and other costs.
The cutback plans are emerging even as Wall Street firms have mostly recovered from the financial crisis and are reporting substantial profits again. But those profits are not as big as they were before the crisis, and it is expected that in the coming months it will be even more difficult for firms to make money. Worries about debt in Europe and the shape that the Dodd-Frank financial overhaul rules will ultimately take, combined with the usual summer doldrums, are prompting banks to act.
“It’s a tense environment right now,” said Glenn Schorr, an analyst with the investment bank Nomura.
Even Goldman Sachs [GS 138.00 1.91 (+1.4%) ], Wall Street’s most profitable firm, is retrenching. Senior executives at Goldman have concluded they need to cut 10 percent, or $1 billion, of noncompensation expenses over the next 12 months, according to a person close to the matter who was not authorized to speak on the record. The big pullback will cause Goldman employees, who have already been ordered to cut costs, to re-examine every aspect of their business.
The firm, this person said, had not set final targets for layoffs, but Goldman was “certain” to shrink headcount in the coming months. Decisions on bonuses are still months away, but they are sure to come down as well if business does not pick up.
Wall Street layoffs and lowered bonusing should pinch the east coast and New York economies. It should elevate uncertainty. All of which should impact consumer spending and real estate values later this year in those markets.
There are at least two big reasons I can think of why earnings will struggle to show growth in the financial sector. First, major banks like JPM have been for the past several quarters pulling loan loss reserves back over to income. You only get to move that dollar one time, so it's not a recurring cash flow item. Eventually, this migration comes to end. Firms like JPM have thrived in earning's reports in part based on this and it should start to slow down and go away, and require organic growth in earning.
Second, a lot of the trading business enjoyed by Wall Street does not seem to be dependable as on going revenue sources. One time revenue sources are great when they happen, but when the dry up they leave a mark!
Organic growth and recurring cash flow is going to be very tough to demonstrate for Wall Street going forward, which forces them to refocus their efforts on expenses!
I've said it before and I will say it again, eventually Wall Street catches up with Main Street. Either Main Street improves or Wall Street catches up to the downside with Main Street. I think it's to the downside, and probably during the next deflationary leg in the economy.
Hope all is well.
J.D. Rosendahl, Rosey