The other day an analyst at a major Wall Street investment house found he needed an inexpensive piece of connecting cable for his computer terminal. He sighed, put on his jacket, and strolled the few blocks to the J&R electronics store and bought it out of his own pocket. Otherwise, he told me, he might have to wait weeks to get the purchase authorised by the firm.
Penny-pinching is not unknown on Wall Street at the best of times. Alan "Ace" Greenberg, the outgoing chairman of Bear Sterns, is notorious for worrying about the price of paper clips. But all the investment banks have become obsessed with costs after one of the worst quarters for mergers, underwriting and equity trading. The company in which my friend works is going through such a tough round of cost-cutting that every expense in excess of $50 dollars (#59) has to be agreed by the chief executive. Much worse, the cuts are causing big lay-offs on the street. Every day researchers, traders, investment managers and analysts are being fired. Merrill Lynch, which on June 26th warned that its profits in the second quarter would fall by half, has laid off 3,300 staff, about 5 per cent of its total workforce. Insiders expect this figure will double before the axe is put away.
Most investment banks that grew rapidly during the bull market are quietly letting staff go. It is a painful process, and risky. Cuts in bonuses can drive valuable employees into the arms of competitors. A quicker-than-expected rebound can leave an investment house short-handed.
This happened to Merrill Lynch two years ago when markets recovered more quickly than anticipated after it fired 3,500 workers, largely in the bond department, when its stock price plummeted in the wake of the collapse of Long Term Capital Management.
Driven by the pressure of quarterly reporting, the cost-cutting can also produce false economies such as a halt in acquiring technology; some of the Wall Street computer systems are surprisingly old and need constant and expensive maintenance.
Almost everyone is suffering in the slump. The Initial Public Offerings (IPOs) which brought huge profits to Wall Street during the tech boom have become rare events, down by more than a half in the first six months from the same period last year. Mergers and acquisitions are down 40 per cent.
Goldman Sachs, once known as "Goldmine Sachs" for the size of its bonuses, saw earnings fall 36 per cent in the second quarter.
The only finance companies doing well are those which specialise in underwriting and trading bonds, such as Bear Sterns and Lehman Brothers. They both increased their profits, and more companies are turning to issuing bonds.
As the environment for brokerage stocks deteriorates, Wall Street faces an unsympathetic public. Its reputation took a beating after analysts continued to hype plummeting stocks last year, hurting millions of small investors who trusted them as independent commentators. Some of these analysts, however, were being richly rewarded for helping land investment banking deals for their employers.
The temptations to hype were great. During the frenzied days of the bull market, investment banks sold about $130 billion in IPO shares and collected billions of dollars in commission from pushing unprofitable companies to market, including Internet retailers such as eToys. First-day stock-trading gains for IPOs averaged 87 per cent in 1999 and 71 per cent in 2000.
The behaviour of Wall Street has now come under critical scrutiny from the National Association of Securities Dealers (NASD), the US Securities & Exchange Commission, the US Justice Department, Congress and the business media. The investment banks being investigated include Goldman Sachs, Lehman Brothers, Bear Sterns, Credit Suisse First Boston, JP Morgan Chase and Morgan Stanley Dean Witter.
There is widespread scepticism about promises to self-discipline - what Fortune magazine described as "a patrician, well-protected industry with a Florentine knack for preserving its privileges".
A new voluntary code of ethics produced last month by the Securities Industry Association, a trade group representing the big investment houses, has been criticised as inadequate, and a ploy to get round the Securities & Exchange rule on Fair Disclosure, imposed last October to end the practice of companies selectively leaking inside information to analysts in exchange for up-beat forecasts.
The voluntary guidelines do not prevent analysts promoting companies in which they have undisclosed share-holdings or that are about to launch IPOs in which their employers have a huge stake. Recognising this, on Monday NASD proposed making a rule that analysts disclose personal holdings and investment bank relationships when promoting stocks on radio, or television, or in speeches.
The investigations have already left blood on the floor. Credit Suisse First Boston fired three San Francisco brokers last week amid allegations that they had violated US securities laws in the allocation of shares in IPOs.
A fuller day of reckoning may be at hand. The big banks may each be forced to repay seven-figure sums before it is all over. Which will mean another round of cost-cutting on Wall Street.
