NEW YORK (Reuters) — Wall Street bankers are used to vicious swings in fortunes - it is in their DNA. Make a killing in the good times, they say, because markets may turn against you tomorrow.
The job losses, bonus cuts and clampdown on the size of trading books this time around, though, seem different. It's not just the euro zone crisis, weak loan demand and volatile trading that has hurt profits, but a raft of new and proposed rules aimed at curbing risk and its sometime partner, reward.
Bankers say they can wait out the cyclical economic forces, but they're choking on fears that the new rules will fundamentally change their business models.
"We are constantly reassessing whether we're experiencing something that is secular or cyclical and under what conditions we would act to shrink or change businesses," Morgan Stanley CEO James Gorman said in a quarterly earnings call last month, adding: "We're not myopically focused on our size."
An admission from the head of the second-biggest U.S. investment bank that he's okay with shrinking is an extraordinary recognition of regulatory and market realities, said Roy Smith, a former Goldman Sachs partner who teaches management practice at NYU's Stern School of Business.
A shrinking bank model has huge implications for many things in business - from how speculative and liquid the world's capital markets will remain to whether thousands of freshly minted MBAs -- not to mention veteran bankers -- will find or keep Wall Street jobs.
Gorman didn't expand on what he may do, but Morgan Stanley has joined other banks in outsourcing business functions, firing employees and slimming bonus pools.
He has also been trimming the bank's reliance on capital-consuming capital markets businesses by expanding his bet on the more stable world of old-fashioned retail brokerage. Fees from advising rich people on investments now fuel more than 40 percent of Morgan Stanley's revenue and should grow as the firm acquires full ownership of a joint venture Gorman engineered in 2009 with Citigroup's Smith Barney wealth unit.
UBS AG has gone further. Following some $50 billion of trading losses during the financial crisis and a rogue-trading scandal earlier this year that cost it $2.3 billion, the Swiss banking giant is reverting to a model in which investment banking and trading are becoming adjuncts to its wealth management operations.
Last Thursday, UBS said it will slash risky assets by almost half and cut its return-on-equity target to 12 to 17 percent for 2013 from its earlier 15 to 20 percent range in the face of tough new capital rules and turbulent markets.
"We have chosen to substantially reduce the risk profile of the bank by exiting and downsizing businesses which are not value added to our client franchise or deliver unattractive risk-adjusted returns," said UBS boss Sergio Ermotti.
The number of new rules confronting banks is substantial.
Under new global capital rules, banks have to raise higher levels of equity to absorb potential losses from their risky assets. That can be achieved by either issuing stock and diluting current shareholders, or by reducing those risky assets, or a combination of the two. Either way, the chance of big returns (and big losses) is reduced.
For the biggest the restrictions are most onerous. Global regulators earlier this month named 29 banks so important to the world's financial system that they must have more capital and closer surveillance than rivals. The list, led by 17 lenders from Europe and eight from the United States, includes Goldman Sachs, JP Morgan Chase and Citigroup.
The Volcker Rule embedded in last year's far-reaching U.S. financial reform law, the Dodd-Frank bill, is also reducing banks' profit potential by curbing trading for their own accounts, and limiting both their derivatives operations and ability to own private equity investments.