WALL Street reported its earnings last week, and it wasn’t a pretty sight: The results indicate – actually, guarantee – layoffs and slashed bonuses. And the job losses could go far beyond Wall Street.
But boom and bust are the way of Wall Street. Problem is, Mayor Bloomberg has done little in his nearly six years in office to wean New York City’s economy from the finance industry’s exhausting cycles – meaning that the pain could be worse than it had to be.
Bear Stearns suffered a 61 percent year-over-year drop in earnings in the third quarter; Morgan Stanley, 17 percent; Lehman Brothers, 3 percent. Of the city’s big investment banks, only Goldman Sachs showed an earnings rise – a whopping 79 percent. Commercial banks don’t release earnings on the same cycle, but some may well report hard hits.
Analysts have attributed much of the pain to a “credit crunch”: Since mid-summer, global investors just haven’t been interested in many of the debt securities that the banks have increasingly had on offer these last few years – from bonds backed by sub-prime-mortgage portfolios to debt that private-equity companies need to complete buyouts at record prices.
So deal volume has sunk. Bankers who structured such debt to sell to investors have no new deals coming in right now – so the salespeople at the banks and the analysts at the ratings agencies don’t have much to do, either. Hedge funds and other investment vehicles whose managers bet poorly on this summer’s events are suffering, too – and banks that have loaned money to companies up front with the idea that they would quickly sell those loans to outside investors are stuck with those risky loans on their own books, for now.
But a “credit crunch” sounds temporary – as if investors will come flocking back to low-quality mortgage securities and other risky debt once they see how silly they’ve been in keeping their cash in their pockets for the last couple of months. And that might not be the case.
Today’s turmoil may not be so much a market glitch as the start of an understanding on the part of banks and other companies, and their clients, that they’ve been far too optimistic in their lending and borrowing practices over the last few years.
Remember: The volume of securities issues whose underlying debt was backed by physical assets, like buildings, had doubled in just three years – sometimes not an indication of prudent valuation or lending.
As banks and investors rethink their previous optimism and look over the dubious loans and bonds already outstanding, they’ll wonder about the true value of the assets or companies that back that debt, whether it’s a “million-dollar” house in Westchester that may really be worth $700,000 or a “billion-dollar” office building in Midtown that’s only worth $700 million. It may take everyone a long time to figure out how over-optimistic they’ve been; in the meantime, they’re unlikely to do much risky lending. Something similar happened in the late ’80s, and the stagnation lasted a few years.
Economists polled by the Wall Street Journal recently raised their assessment of the estimated probability of a recession in the next year to about one in three from one in four.
In New York City (despite some early layoffs this summer at Lehman and Bear Stearns), there’s really no way of knowing how deep job cuts will be this time around until it’s over.
Every downturn is different – but consider some history:
* During the late-’80s “crunch,” New York City’s securities industry alone lost 20 percent of its jobs from a 1987 peak; it didn’t start growing jobs until 1992 and it didn’t fully replace those lost jobs until 1994. Today, the securities industry employees about 180,000 people – so a 20 percent cut would mean about 35,000 jobs lost directly.
* From ’00 to ’04, after the tech bust and 9/11, Wall Street lost about 40,000 jobs, another 20 percent or so of total industry employment back then – and it’s only recovered about half of those jobs since.
Plus, every job on Wall Street creates two other jobs within New York City, the state comptroller estimates. So a loss of 25,000 Wall Street job means that the city could lose 75,000 total jobs, or about 2 percent of the city’s total.
And even where the finance industry doesn’t cut jobs, it will cut bonuses. Last year’s bonuses totaled $24 billion, up more than $3 billion from the previous year and up from $16 billion two years before that. And bonus cuts on Wall Street also mean job losses elsewhere in the city – because a banker who takes home $250,000 instead of $500,000 can’t buy a nice watch for her husband for the holidays, helping to pay a high-end clerk’s salary.
The mayor of New York can’t do anything about natural Wall Street cycles, nor should he try.
But the mayor could have spent the flush years trying to encourage entrepreneurs and other creators of good jobs to move to the city, so that New York’s economy could become less dependent on Wall Street.
The only practical way to do that is to cut the city’s tax rates on both personal and business income. Our depth and breadth of such taxes put us in a class by ourselves when compared to other American cities like Chicago, Houston or even Los Angeles.
The mayor hasn’t done that, instead preferring to reap as much money from Wall Street companies and workers as he could during the good years. That policy decision means that less wealthy New Yorkers whose jobs depend on Wall Street will suffer more than they might have during the inevitable bad times – and “inevitable” may be here once again.
Nicole Gelinas is a Chartered Financial Analyst and a senior fellow at the Manhattan Institute.