The outlines of a new, smaller Wall Street came into view Tuesday, with firms from Japan to Switzerland announcing sharp cutbacks a day after commodities broker MF Global Holdings Ltd. filed for Chapter 11 bankruptcy protection.
After growing to unprecedented size before the financial crisis and shrinking only slightly during a deep downturn, the global finance industry is undertaking a massive retrenchment.
Nomura Holdings Inc. tripled its annual cost-cutting target to $1.2 billion, with most of the new reductions centered in Europe, while Credit Suisse Group said it will slash 1,500 positions in its second round of staff reductions in four months.
The belt-tightening comes on the heels of pullbacks at major firms around the world. UBS AG said in August it would cut 3,500 jobs, and executives there are expected to further scale back its once-high-flying investment bank. Goldman Sachs Group Inc. said in July it expects to cut 1,000 positions, but the firm has already exceeded that number and people familiar with the matter say the toll is likely to rise. Goldman last month reported its first quarterly loss since the 2008 financial crisis.
People are by far Wall Street's biggest cost, so mass cutbacks are common during profit downturns. But some industry executives and analysts argue that the current reductions are likely to be longer-lasting as banks brace for a long period of tighter regulations, uncertain markets and sluggish economic growth.
"We are seeing the tremendous hollowing out of Wall Street," said Steven Eckhaus, a partner and chairman of the executive-employment practice at the law firm Katten Muchin Rosenmann LLP. "This is not a boom and bust cycle."
Securities industry employment nationwide dropped by 9% between 2007 and 2009 before partly rebounding to a recent 811,700 jobs, according to government data. But layoffs aren't the only lever stressed firms are pulling: With business soft for a second straight year, workers across the sector are bracing for lower year-end bonuses.
The cutbacks may come as a shock to many bankers who had spied opportunity in the last crisis. Firms such as Nomura and UBS combed through the masses of bankers left unemployed by the 2008 meltdown, offering large pay packages and bonuses in hopes they could ride the wave of a rebounding economy.
Nomura hired nearly 1,000 people in 2009, promising an expansion in U.S. investment banking a year after buying the European and Asian arms of Lehman Brothers Holdings Inc. Credit Suisse went on a hiring spree in areas including commercial real estate, and UBS added at least 300 people to the Swiss bank's fixed-income business in 2010.
These banks were bulking up in a typical boom and bust cycle of the securities industry—responding to the end of the recession and improvements in the markets. Credit Suisse, Goldman and UBS declined to comment.
For a while, the strategy worked and 2009 was one of the best years in recent banking history as profits boomed.
But the rebound hasn't carried through the way that Wall Street firms expected. Deal-making has quieted this year amid market turmoil stemming from the European sovereign debt crisis and the slowdown in global growth expectations.
Investment-grade bond sales dropped 30% in the first 10 months of 2011 from the same period in 2009. Merger and acquisition activity around the world was just 60% of the level of activity in the first 10 months of 2007, which was a peak for deal-making in the past decade, according to Dealogic. Sales of stock and other equity securities this year are 70% of 2007 levels.
The soft markets and slowing economies pressure firms that are already cutting jobs in the face of massive technological and regulatory shifts. The investment banking model at many firms has been wounded as regulatory reforms like the Volcker rule, which will limit banks' use of their own funds to make market bets, and tighter capital requirements will make it harder for them to make money from trading and investing.
The new rules won't take effect until July , but their impact already is being felt.
"Part of this culling is right-sizing for the current environment, but also to prepare for Basel III and a post Dodd-Frank world," said Howard Chen, analyst at Credit Suisse Group, referring to rules that will require banks to have greater capital cushions and the Dodd-Frank regulatory overhaul, which includes the Volcker rule.
At Credit Suisse, some employees were surprised to learn that cuts will come from its commercial mortgage-backed securities division in the U.S. The team of about 50 was warned last month that their jobs would likely be cut. The bank had hired new staff that were meant to report to work, but may not now ever start their jobs.
In addition to commercial real estate, Credit Suisse is exiting the trading of interest rate derivatives, emerging market debt and commodities where the counterparty is not required to post collateral, it said Tuesday. Those types of trades, often conducted with sovereign nations and with large corporations, would require the firm to hold more capital under upcoming Basel regulations. The bank is also planning to cut its investment banking ranks in Europe, Africa and the Middle East.