Wall Street firms faced with declining profits could cut another 10,000 jobs in a blow to New York’s economy and finances, according to the state’s comptroller.
The city’s securities industry may lose 10,000 jobs by the end of 2012, Thomas DiNapoli, the official who oversees New York’s finances, said in a report released on Tuesday. That would bring total job losses to 32,000, or nearly 17 per cent of the workforce, since January 2008.
“The securities industry had a strong start to 2011, but its prospects have cooled considerably for the second half of this year,” Mr DiNapoli said. “It now seems likely that profits will fall sharply, job losses will continue, and bonuses will be smaller than last year ... As we know, when Wall Street slows, New York City and New York state’s budgets feel the impact and that is a concern.”
The sector has lost more than 4,000 jobs since April 2011, and several large companies have already announced plans for further redundancies. Bank of America said last month it would cut 30,000 jobs, or 10.5 per cent of its workforce, as part of a restructuring plan designed to save $5bn a year. Goldman Sachs said in July it would eliminate at least 1,000 jobs.
Mr DiNapoli’s report said the recent round of downsizing has come in response to declining profitability at financial institutions hit by global market turmoil over the past two years, citing “a large drop in revenue from proprietary trading”. Profits in the first half of 2011 dropped 10.8 per cent to $12.6bn, led by a sharp decline in the second quarter.
“While profitability rebounded strongly during the second half of 2010, this appears unlikely to recur in the second half of 2011, given advance reports of poor third-quarter performance at several major firms,” the report said. Banks including Goldman Sachs, Citigroup, Bank of America and Morgan Stanley are due to report third-quarter earnings next week.
Mr DiNapoli forecast profits at New York Stock Exchange-listed firms would be less than $18bn in 2011 – a 35 per cent decrease from 2010. If that prediction comes true, it will miss the $20bn in profits the city has estimated in its financial planning.
That decrease, as well as redundancies in the financial industry, will also reduce the amount of money the city and state collect in tax revenues. Mr DiNapoli’s office estimated that from 2008 to 2010, personal income and business taxes related to the securities industry dropped by more than 50 per cent to $2.3bn. While receipts rose to $2.6bn in 2011, that was just 7 per cent of the city’s revenue base – little more than half the 13 per cent the industry contributed before the recession.
“As Wall Street’s slowdown affects business and personal spending in the rest of the economy, overall tax collections will also weaken, widening the state and city budget gaps,” the report warned.
The report also showed that how the financial industry pays its workers has shifted, with overall compensation rising but bonuses decreasing.
“The increase reflects higher staffing levels than one year earlier, even though the industry has begun to shed jobs, and an increase in base pay in response to regulatory changes that discourage large cash bonuses,” the report said.
Such measures, designed to reduce risk, are necessary for the industry, Mr DiNapoli said.
“Excessive risk-taking on Wall Street was a major factor leading to the financial crisis and the recession,” he said. “Regulatory changes that reduce risk and focus attention on long-term profitability rather than short-term gains will enhance stability.”