Wall Street is ending this year with a doozy of a hangover, one that promises to drone on a few more months, at least.
After feasting on Internet stocks, telecommunications bonds and cross-border mergers in Europe for most of the 1990s, investment banks have spent the last few months purging employees and businesses in a rush to reduce their bloat. They hoped to trim down enough to stem the slide profits have taken for almost two years -- since the collapse of technology stocks in March last year.
Next year "will be a year of restructuring and streamlining," said Richard Strauss, an analyst at the Goldman Sachs Group.
By the end of November, Wall Street was "probably about one-third of the way through" its cost-cutting process, Strauss said. He said it would take at least a year for those cuts to translate into the profitability that investors had come to expect from the biggest securities firms.
But first, Wall Street must finish clearing out the excesses left from the era of irrational exuberance. Investment banks have eliminated more than 30,000 jobs in the last year, dismissing bankers, traders and research analysts in the biggest retrenchment since the late 1980s.
Holiday pink slips
At Merrill Lynch, which rushed to eliminate thousands of jobs between Thanksgiving and Christmas -- possibly losing 10 percent or more of its 65,000 employees -- executives are talking about their need to "resize" the firm for the postbubble economy. With the issuance of new stock recovering slowly from a deep slump and corporate merger activity stalled, the outlook for Wall Street is uncertain at best.
"A major drag on brokers' earnings this year has been the plight of the mega-merger," Strauss wrote recently. Through October, only 42 deals valued at more than US$1 billion had been announced, down from 62 last year, he wrote.
At least one of those, Hewlett-Packard's pending US$23.6 billion purchase of Compaq Computer, is in jeopardy of falling apart, with Walter Hewlett and other members of the founding families opposed to it. In the meantime, another potential deal, Dynegy's plan to buy Enron, ended disastrously, when Dynegy withdrew in late November.
Unless the economy and the stock market rebound strongly soon, next year could start out as unpleasantly as this year is ending, analysts and economists said.
"We're going to hear layoff announcements into the first quarter of next year," said Frank Fernandez, chief economist of the Securities Industry Association, a trade group. Fernandez said that he believed that Wall Street profits would bottom out by the second quarter of next year but that firms might not be ready to expand again for another two or three years.
The earnings of major securities firms were expected to be as much as 35 percent lower this year than last year. Analysts expected fourth-quarter earnings for most firms to fall again, the seventh consecutive quarter-to-quarter drop since the market -- and Wall Street's profits -- peaked in the first quarter of last year.
Big profits
As dismal as this year has seemed, Fernandez noted, it is likely to rank as the fourth or fifth-most profitable year in Wall Street history.
"In terms of profitability, this is more like 1997 or 1998," Fernandez said. "If you're an equity investment banker, yes, it's been a bad year for you, and you've probably already lost your job. But if you're in fixed-income sales and trading or you're a systems guy, this has been a good year."
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