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."
Profit gusher. Wall Street loves a good story about a successful industry or firm. But that penchant evidently doesn't extend to itself, as several large firms declined or ignored requests to speak with U.S. News about their soaring profitability. Still, the results can be seen in recent earnings reports. Merrill Lynch: "Record first-half earnings." Goldman Sachs: "Best quarterly results." Morgan Stanley: "Record revenues [and] impressive market share gains."
Trading gains, together with swelling commissions and fees, underwriting revenue, and asset management charges, have paced the industry's recovery. Underwriting revenue, for example, was $5.2 billion in the first quarter, up 43.6 percent from a year earlier, on the strength of debt issuance and a rebound from the moribund level of stock issuance last year. Commissions and fees, such as on stock trades, reached $13.2 billion, up 35.2 percent from a year earlier, reflecting a rebound in trading activity. New York firms have also received hundreds of millions of dollars in government aid following the 9/11 attacks.
That the extraordinary profits aren't trickling down can be seen at the industry's epicenter, in lower Manhattan, and across the nation alike.
Take the New York City commercial real-estate market, a key place for reading the pulse of the securities industry. Only recently has activity finally shown signs of picking up, as firms have worked through empty "shadow space" they were saddled with post-bubble, says M. Myers Mermel, chief executive of TenantWise, a New York commercial real-estate and consulting firm. But Mermel says he won't be ready to pronounce things have turned unless talk translates into action and more firms sign deals later this year. "There seems to be more confidence, especially in the last month," he says. But "it's hard to quantify this sense we're feeling. We could be wrong." So far, he says, those regaining jobs appear to be mostly senior-level workers, who have been unemployed or ventured into different fields after being laid off.
Cautious hiring. Another good vantage point is at the start of the recruiting pipeline--the nation's top business schools. Today, M.B.A. students and graduates say it's clear recruiting is looking up. Nevertheless, many students aren't getting first-choice jobs, and pay packages, while generous by most workers' standards, aren't racing ahead.
Thymios Kyriakopoulos, 28, who recently graduated from the University of Pennsylvania's Wharton business school, considers himself fortunate after landing a job trading interest rate options with Goldman Sachs in London. But many classmates weren't so lucky, he says: Of some 75 fellow students looking for jobs at so-called tier-one firms, only about 15 were successful. When Joanna Kartalis, 27, entered Duke University's Fuqua school a year ago, she and her classmates worried about job prospects after having watched so many layoffs. Now ensconced in a summer internship with Banc of America Securities, Kartalis says she's feeling less apprehensive but adds: "I certainly hope there'll be even more improvement."
Internships, in fact, are a sign of the cautious mood. Less willing to commit to standard hiring, firms are instead relying more on what's known as the "10-week job interview," in which the players size each other up much more closely. "Firms are more reluctant to rely solely on interviews to give students full-time job offers," says Meghan Kelly, 28, another recent Wharton graduate. "They want to see firsthand the quality of your work, how you perform under stress, and how you fit into the culture." Reflecting this, the portion of Duke M.B.A.'s doing their internships on Wall Street is up about a third this year, says Sheryle Dirks, director of the Career Management Center. "That's what we've heard consistently: 'We're focusing on our intern hires,' " she says.
Stanford University's graduate business school has seen a rebound in companies coming to campus and the number of jobs they've got to offer, but it's clear "this expansion is more conservative," says Andy Chan, director of its career management center. According to students and career counselors, a typical package for an M.B.A. entering the industry is a salary of about $85,000, with a bonus--perhaps some paid upfront, some later--of about $25,000.
Looking ahead, the recovery looks solid, although evidence suggests the pace is slowing. In a recent report on the brokerage industry, for example, Goldman Sachs analysts say that the peak of what they call the current "minicycle" may already have been reached. In the same vein, Merrill Lynch's CEO, E. Stanley O'Neal, spoke recently of how his firm will pursue "disciplined growth." And not all big firms are doing well. Last month, Charles Schwab Corp. ousted its CEO and reinstalled its namesake in the post, then followed that move with an announcement of plans to close 53 branches and lay off 245 workers. A onetime pacesetter, Schwab is being squeezed from above and below--caught between financial giants like Goldman and Merrill and low-cost online players like E*Trade Financial Corp.
Fernandez, the Securities Industry Association's economist, notes that firms' average fees and commissions continue to decline. Recent money market fund withdrawals that ordinarily would have been plowed into stocks instead appear to have been diverted into real estate. "It's not like we're going to retreat," he says. "But it's at a stage now where it's maturing."
With that maturity comes hope among those who rely on Wall Street that the securities firms will share their wealth more broadly. In some quarters, that's evident already. Take Analar Corp., a New Jersey helicopter charter firm. In the past year, its business of ferrying well-paid brokers, traders, and CEO s from Manhattan to locales like Boston and the Hamptons--at rates up to $1,900 per hour--has taken off by some 15 percent to 20 percent. "They're spending the money again," says Vice President Heinz Graumann. In coming months, plenty more will be looking to tag along for the ride.
Let the Good Times Roll
By keeping costs down, and adding few new employees, the securities industry has boosted its profits to levels not seen since the glory days of 2000.
The Money's Back...
Securities industry domestic pretax profits in billions
2000 $31.6
2001 $16.0
2002 $12.1
2003 $24.1
2004 $27.8*
...But Not the Jobs
Average securities industry employment in thousands
2000 804
2001 835
2002 790
2003 764
2004 777*
*Estimate
Sources: Securities Industry Association, Bureau of Labor Statistics
This story appears in the August 9, 2004 print edition of U.S. News & World Report.