The evidence is everywhere. The increasing regulations onWall Street -- as required by the Dodd-Frank law and still beingwritten by the Federal Reserve, the Securities and ExchangeCommission, the Commodities Futures Trading Commission andothers agencies in the U.S. and Europe -- will require theremaining companies to increase their capital, curb their risk-taking and reduce their principal investing.
Aside from the fact that investing principal andproprietary risk-taking per se had nothing to do with the recentfinancial crisis -- and that the ability of Goldman Sachs GroupInc. (GS) to make a huge proprietary bet against the mortgage marketprobably helped saved the firm -- these new rules will greatlycurb Wall Street��s revenue and profitability at a time when thebusiness itself is suffering a severe slowdown. (What sunk WallStreet in 2008 was the seemingly more conventional business ofbeing a middleman for the manufacture, packaging and sale ofincreasingly risky mortgage-backed and other debt securities.)
Not being able to make those big proprietary bets when yousee them developing -- in effect, the closing of the casino thatWall Street has become over the past few decades -- willseverely limit bankers�� money-making opportunities. It will alsoprotect the rest of us when those big bets go wrong or areperceived to be too risky. (For every Goldman Sachs actingbrilliantly, there is an MF Global Holdings Ltd. actingfoolishly).
Signs of Withdrawal
There is little debate anymore that Wall Street had becomehighly dependent on its trading operations. Something like 90percent of Bear Stearns��s profits in the years leading up to itsMarch 2008 demise came from its trading and debt-originationactivities. The percentages are not that much different atGoldman Sachs, where in 2010 its traditional investment-bankingoperations generated only $1.3 billion of $12.9 bi! llion in pretax earnings, about 10 percent. All but $1 billion or so ofthe rest of Goldman��s pretax earnings came from its trading,lending and investing businesses.The slowdown in business, combined with the looming tradingcurbs, has resulted in job losses across Wall Street. MorganStanley (MS) recently announced it was firing 1,600 employees.Goldman Sachs has done its usual turn of eliminating the bottom10 percent of its workforce and a group of its long-servingpartners. Bank of America Corp. (BAC) announced that about 30,000employees would be chopped by the end of 2012, although a numberof the firm��s investment bankers lost their jobs in the pastmonth.
Yet those suffering the most are the foreign firms thatwere trying to break into Wall Street��s business. NomuraHoldings Inc. (8604) has pretty much scuttled its most recent WallStreet experiment (it bought Lehman Brothers Holding Inc.��sEuropean and Asian banking operations) and firms such as SocieteGenerale SA (GLE), UBS AG (UBSN), Credit Suisse Group AG (CSGN) and Royal Bank ofScotland Group Plc (RBS) are all cutting Wall Street bodies.
In November, Bloomberg News estimated that more than200,000 people who work in finance had already lost or wouldlose their jobs this year.
Not only will the head-count reduction on Wall Streetcontinue for the foreseeable future, but the vast sums overpaidto bankers and traders will inevitably continue to fall as well-- as many of them are finding out this bonus week. There issimply no easier and quicker way for Wall Street firms to keepup a modicum of profitability than by cutting pay for the peoplewho still work there. Needless to say, the inevitable decline inWall Street��s compensation will mean less tax revenue for NewYork City and New York State and fewer government services forthe rest of us (absent higher taxes).
Ivy League Doubts
The most reliable leading indicator of Wall Street��s futureprospects is the way recent graduates of Harvard, Princeton andYale -- supposedly our ! best and brightest -- choose to spendtheir time after graduating. For years, hordes of graduates fromthose schools beat a fast path to Wall Street. Now the road isfar more difficult to travel. For those who choose to make thejourney, there is the prospect of incurring the wrath and scornof fellow students who make up the various Occupy Wall Streetmovements -- a fact not likely to deter many -- and then thereare dimmer prospects for a job on Wall Street generally, whatwith the slowdown in business.According to a Dec. 21 article in New York Times, whereasin 2006 some 46 percent of Princeton graduates who had jobslined up after graduation went to Wall Street, four years laterthat number had fallen to 36 percent. At Harvard, in 2006, aquarter of the class got jobs in finance; by 2011, that numberhad fallen to 17 percent. At Yale, in 2006, 24 percent of thegraduates had jobs in finance and on Wall Street, while in 2010,the number of graduates going to Wall Street had fallen to 14percent.
The word around Goldman Sachs, I��m told, is that even thoseoffered a still highly coveted entry-level job at the firm arehaving second thoughts about taking it. More and more, banks arelosing talent to Teach for America, a fact that may turn out tobe one of the most heartening consequences of the financialcrisis.
(William D. Cohan, a former investment banker and theauthor of ��Money and Power: How Goldman Sachs Came to Rule theWorld,�� is a Bloomberg View columnist. The opinions expressedare his own.)
