More Jobs to Be Cut as City Faces Massive Shake-Up ; NEWS ANALYSIS after the Champagne Days of the Nineties Bull Market and Dot.com Boom, the Banking Bubble Has Burst
Chris Hughes Financial Editor, The Independent (London, England)
THE SQUARE Mile shrank a little more yesterday after Merrill Lynch, the giant US investment bank and world's largest stockbroker, said it was accelerating an aggressive cost-cutting programme that has seen the loss of 6,100 jobs this year. Could it be that continuing City redundancies are a sign that the investment banking industry is not just shrinking, but in the throes of more fundamental change?
The City is suffering a terrible hangover following the excesses of the 1990s bull market which culminated in the dot.com boom. Megadeals such as Vodafone's takeover of the German telecoms giant Mannesmann, and Glaxo Wellcome's marriage with SmithKline Beecham, generated fees worth hundreds of millions of pounds. In 1999 and last year, investors displayed an insatiable appetite for new technology companies such as lastminute.com, providing easy fee income for the banks that floated them.
But by September last year the party was over as investors began to worry about a slowdown in the US economy. After last month's terrorist attacks, the fear is now of a recession.
Old hands in the City were not surprised by the scale of Merrill Lynch's cutbacks yesterday. Headcount at the company has been reduced by 8 per cent since January, to 65,900, including 6,000 in London, but it is not the first time Merrill has taken the axe to costs. Merrill laid off thousands of workers in the wake of the collapse of Long Term Capital Management, the hedge fund, during the 1998 Russian debt crisis. The downturn proved short-lived and within months Merrill was aggressively recruiting again.
This time round, the downturn has been prolonged, with the FTSE All- Share suffering its longest period of decline since the bear market of 1972-74. Banks that expanded aggressively through the boom times are today replete with staff: Merrill, having played catch-up aggressively after being caught out in 1998, has been left particularly exposed.
"When the current downturn began, Merrills were still in the number three slot, but it needed to be number one to survive," one analyst said. Merrill's third-quarter net income of $422m (pounds 291m) was its worst performance since the LTCM crisis, and marked a year-on-year decline of 52 per cent.
Merrill Lynch is not alone. On Wednesday, JP Morgan Chase, another Wall Street giant, announced 6,000 job losses. And yesterday Goldman Sachs said up to 500 staff would depart over the next six weeks following "performance reviews".
Perhaps surprisingly, the cutbacks do not extend to the City bonus, which makes up the bulk of an investment banker's salary. It is variable, but when times get tough there is a strong business case for cutting staff rather than the bonuses of staff who survive the cull. "In a downturn your priority is to come out of it having kept your best people. And you always have to pay to keep them," said the managing director of investment banking at one City institution yesterday. …