Stellar returns
The market may be in the doldrums, but you wouldn't know it from Wall Street's own numbers
With all the high-profile troubles on Wall Street lately, it might seem like a dour time for the securities industry. The leading names of high finance have paid billions to settle cases ranging from tainted research to discrimination against women to special trading for fat-cat clients at the expense of everyday investors. New investigations are popping up, while the stock market itself has done little but slither sideways for months.
But weep not for Wall Street. In spite of it all, and even following the heavy blow struck in the 9/11 attacks, the nation's securities firms are quietly having a barnburner of a year. They're now poised to rack up an estimated $27.8 billion in profits this year, second only to the $31.6 billion seen in 2000, the year before the Internet and technology bubble burst. What's more, Wall Street has boosted its profit margin by about 25 percent. Firms had "big shocks to absorb," says Frank Fernandez, chief economist for the Securities Industry Association. "But we've gone past that. We're well into a recovery."
Still, as the industry has enjoyed this renaissance--which has been felt across all major business lines--it hasn't been sharing the wealth. Much like the national economy, the Street's turnaround, while not jobless, has thus far failed to spark the kind of hiring and pay increases typically seen in recoveries past. Securities industry employment has ticked up from a low of 758,000 workers in May 2003 to 780,000 a year later. But the total remains below the peak of 841,000 reached in March 2001, and it isn't expected to approach that number for a long time. Top talent at firms is reaping respectable bonuses after a couple of lean years, at least by Street standards. But there's no sign of the outsize deals of the recent past, especially the gangbuster offers made for new hires. "I've been following Wall Street for 20 years, and this is the first time we've had this fact pattern: good business, no hiring," says Alan Johnson, managing director of Johnson Associates, a New York compensation consultant. "Business is better, but there are fewer mouths to feed. [That] means a shareholder takes more home."
In large part, the turnaround is due to increased productivity. Securities firms have long plowed big bucks into technology, which allows them to do more with many fewer people. In the past several years, estimated productivity growth has been in double digits, Fernandez says. Some of that reflects massive spending for computer upgrades required for Y2K--the turn of the century. But after that, big tech investments "just became part of the competitive landscape," he says. In all, firms have reaped a sevenfold increase in output over the past 25 years--with roughly the same number of people, he says. Firms have also been cautious about making new hires after cutbacks, because they're reluctant to set the stage for the next jump off the cliff. "It used to be the three things you could count on on Wall Street were death, taxes, and overhiring," says Johnson. "They've been very conservative this time."
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