Financial industry faces increased layoffs, lower earnings

For a while, Wall Street seemed impervious to the economic woes clobbering Main Street, with bank profits, bonuses and share prices rebounding sharply.

Not anymore.

As the country’s major banks begin reporting third-quarter earnings, a new pessimism is taking hold on Wall Street based on the growing belief that the economy will remain weak for some time, limiting the industry’s ability to make money.

Without strong economic growth, “you don’t need as many financial services as we have now,” banking analyst Nancy Bush said.

Wall Street analysts who follow their own industry have recently slashed earnings estimates for a number of big players. Several firms have quietly fired staff, and many more layoffs are expected by early next year. There are even predictions of a severe drop in Wall Street’s notoriously generous compensation.

“We’re going to see a larger increase in unemployment in the financial services than anyone had expected,” said Steven Eckhaus, a lawyer who advises banks on employment matters.

Bank stocks have slid since peaking in April. Shares of Bank of America Corp. are down about 30 percent, while JPMorgan Chase & Co. is off more than 12 percent.

JPMorgan on Wednesday reported that third-quarter revenue fell to $23.8 billion from $26.6 billion. The two remaining giant firms that are predominantly investment banks, Goldman Sachs Group Inc. and Morgan Stanley, have seen their earnings projections plunge in recent weeks and months.

Rochdale Securities analyst Richard X. Bove felt compelled to apologize recently when he reduced his earnings estimate for yet another bank. “The reasons for the reductions are not due to failures within the firms, but rather the weakness in the industry,” he wrote.

Layoffs could reach 80,000

Although the newly pessimistic outlook stems in part from recently tightened regulations that will limit some of Wall Street’s most profitable activities, the mood largely reflects the persistent sluggishness of the economy.

“Projecting forward, it seems like the profits of Wall Street and Main Street are going to be more in sync,” said Michael Wong, a bank analyst at research firm Morningstar Inc. “The banks have had to readjust their expectations and to readjust their hiring practices.”

Meredith Whitney, one of the most respected analysts following financial companies, recently projected that in the next year Wall Street firms could shed as many as 80,000 jobs – 10 percent of their combined work forces.

Bank of America, JPMorgan and the Wall Street unit of Britain’s Barclays Bank have in recent weeks laid off staff such as investment bankers and traders, according to people familiar with the moves. Morgan Stanley is said to have imposed a firmwide hiring freeze.

Revenue likely to be on decline

But among the lines of business on Wall Street, trading could take the biggest hit from the weak economy as well as from new regulatory constraints.

Trading revenues since the spring are already down from their eye-popping levels in the same months of 2009, although that was to be expected.

“You had to be stupid not to make good trading profits last year,” said analyst Bush, citing the big stock market rebound that began in March 2009, coupled with the relative ease with which traders can make money in a period of rising share prices and high market volume.

The summer months were “painfully slow” for trading, Jefferies Group Inc. Chief Executive Richard Handler told analysts last month as the midsize investment bank got a jump on reporting earnings because its fiscal third quarter ended Aug. 31.

Profitable strategy banned

Some of the layoffs at JPMorgan and Bank of America were in units doing so-called proprietary trading, which at banks was largely banned by the federal financial regulatory overhaul enacted during the summer. Recently adopted international rules also could reduce trading profits by limiting the amount of money a bank can have tied up in risky activities.

Until recently, banks had expressed confidence in their ability to adapt and even profit under tighter regulation. But a long period of economic weakness, which Wall Street economists now say is likely, is another matter.

If those forecasts are borne out, the industry could see little growth, said Handler of Jefferies, which was hiring furiously early this year.

“If the environment continues to be extremely slow,” he said, “all investment banks are going to be slowing down their expansion plans.”