People walk by the New York Stock Exchange.
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Less than six months ago, Wall Street bankers were reaping the rewards from a historic boom in mergers and IPOs.
Now, thanks to a confluence of factors that have cast a pall over markets and caused most deal categories to plunge this year, broad-based job cuts loom for the first time since 2019, according to industry sources.
The turnaround illustrates the feast-or-famine nature of Wall Street advisory work. Firms were caught understaffed when central banks unleashed trillions of dollars in support for markets at the start of the Covid-19 pandemic. The ensuing surge in capital markets activity like public listings led to a bull market for Wall Street talent, from 22-year-old college graduates to richly compensated rainmakers.
For the first time in years, bank employees seemed to gain the upper hand. They pushed back against return-to-office mandates. They received record bonuses, multiple rounds of raises, protected time away from work and even Peloton bicycles.
But that’s over, according to those who place bankers and traders at Wall Street firms.
“I can’t see a situation where banks don’t do RIFs in the second half of the year,” David McCormack, head of recruitment firm DMC Partners, said in a phone interview. The word “RIF” is industry jargon meaning a “reduction in force,” or layoffs.
The industry is limping into the traditionally slower summer months, squeezed by steep declines in financial assets, uncertainty caused by the Ukraine war and central banks’ moves to combat inflation.
IPO volumes have dropped a staggering 91% in the U.S. from a year earlier, according to Dealogic data. Companies are unwilling or unable to issue stock or bonds, leading to steep declines in equity and debt capital markets revenues, especially in high yield, where volumes have fallen 75%. They’re also less likely to make acquisitions, leading to a 30% drop in deals volume so far this year.
Wall Street’s top executives have acknowledged the slowdown.
Last month, JPMorgan Chase President Daniel Pinto said bankers face a “very, very challenging environment” and that their fees were headed for a 45% second-quarter decline. His boss, CEO Jamie Dimon, warned investors this month that an economic “hurricane” was on its way, saying that the bank was bracing itself for volatile markets.
Daniel Pinto, JPMorgan’s chief executive of corporate and investment bank.
Simon Dawson | Bloomberg | Getty Images
“There’s no question that we’re seeing a tougher capital markets environment,” Goldman Sachs President John Waldron told analysts at a conference this month.
The industry has a long track record of hiring aggressively in boom times, only to have to turn to layoffs when deals taper off. (The volatility in results is one reason investors assign a lower valuation to investment banks than say, wealth management firms.) In the decade after the 2008 financial crisis, Wall Street firms contended with the industry’s declining revenue pools by implementing annual layoffs that targeted those perceived to be the weakest performers.
Banks paused layoffs during the pandemic bull market as they struggled to fill seats amid a hiring push. But that means they are now “fully staffed, perhaps over-staffed for the environment,” according to another recruiter who declined to be named.
The numbers bear that out. For example, JPMorgan added a net 8,000 positions at its corporate and investment bank from the start of 2020 to this year’s first quarter. The biggest Wall Street firm by revenue now has 68,292 employees, 13% more than when the pandemic began.
Headcount jumped even more at Goldman in the past two years: by 17% to 45,100 workers. Employee levels at Morgan Stanley jumped 26% to 76,541 people, although that includes the impact of two large acquisitions.
The math is simple: Investment banking revenue may be falling back to roughly pre-pandemic levels, as some executives expect. But all of the major firms have added more than 10% in headcount since 2020, resulting in a bloated expense base.
“When banks have a revenue problem, they’re left with one way to respond,” said McCormack. “That’s by ripping out costs.”
The recruiter said he expects investment banks will trim 5% to 8% of workers as soon as July, after second-quarter results are released. Analysts will likely pressure bank management to respond to the changing environment, he said.
Sources close to JPMorgan, Goldman and Morgan Stanley said they believed that the firms have no immediate plans for broad layoffs in their Wall Street operations, but may revisit staffing and expense levels later this year, which is a typical management exercise.
Banks are still selectively hiring for in-demand roles, but they are also increasingly allowing positions to go unfilled if workers leave, according to one of the people.
“Business has dropped off,” another person said. “I wouldn’t be surprised if there was some type of headcount reduction exercise in the October, November timeframe.”
The saving grace on Wall Street this year has been a pickup in some areas of fixed-income trading. Greater volatility in interest rates around the world, surging commodity prices and inflation at multi-decade highs has created opportunities. JPMorgan’s Pinto said that he expected second-quarter markets revenue to increase 15% to 20% from a year earlier.
That too, may eventually be under pressure, however. Banks will need to carefully manage the amount of capital allocated to trading businesses, thanks to the impact of higher interest rates on their bond holdings and ever-more strict international regulations.
For employees who have been resisting return-to-office mandates, the time has come to head back, according to McCormack.
“Banks have been very clear about trying to get people back to work,” he said. “If you aren’t stellar and you are continuing to work from home, you are definitely most at risk.”