Bears and Brokerages

Wall Street may not be a paragon of business efficiency, what with its lavish bonuses, outsized advisory fees, and overpriced commissions. But Wall Street is very good at reacting quickly to economic downturns, in the sense that brokerage houses and investment banks tend not to wait to cut costs. In the wake of this summer’s devastation, most bonuses have been either trimmed or eliminated, and job cuts are on the horizon. Actually, in the case of Merrill Lynch, the job cuts are already here. In a much-anticipated move, Merrill announced yesterday that it would be eliminating 3,400 jobs, or five percent of its workforce.

Although the size of the cuts was bigger than some people had expected, rumors about them had been circulating for weeks. Merrill is the largest brokerage house, and perhaps as a result is the one that seems most like a traditional corporation. It’s fitting, then, that Merrill would be the first on the Street to take the steps that everyone else is going to have to take in the near future. Two and a half years of an out-of-control bull market had everyone–well, almost everyone–looking for years of uninterrupted boom times. Those dreams came apart so quickly, and so definitively, that the arrival of the bear on the Street is only now being felt.

As it happens, Wall Street did a good job of keeping its payrolls lean, and not indulging in the kind of over-hiring and over-expenditure that made the aftermath of the 1987 crash so painful (at least for formerly rich stockbrokers). Still, investment banks and brokerage houses can’t say, as the rest of American business can, that what happens in the stock market is really secondary to what happens in the real economy. For Merrill Lynch, Wall Street is the real economy. And it’s not exactly the sector you want to be in right now.

Merrill Lynch, for instance, saw its revenues in the most recent quarter drop 7 percent from a year ago, while its profits were less than a fourth of what they were in the previous quarter. (Merrill made $400 million less between July and September than it had between April and June.) The firm’s trading revenues fell by 71 percent. That results not from bad decisions by Merrill traders, but from the fact that most of Merrill’s trading is client-based, which means that the firm will buy stock that a client wants to sell, even if it then has to sell it at a loss. And when the market’s cratering, you often have to sell at a loss.

Commissions, not surprisingly, were actually up, since everybody was dumping their holdings. But revenue from equity underwriting and M&A business was sharply lower. All in all, there were no upside surprises from Merrill. Things were as bad last quarter as we thought they were. And it’s not clear that they’re getting any better. Certainly Merrill’s own market strategists and economists don’t think so. They’ve been forecasting a profits recession and a bear market for months now, and yesterday’s job cuts bring the firm’s own operating stance in line with its expectations for 1999. Merrill Lynch remains the dominant player in the global brokerage marketplace. But it’s going to take a while for that marketplace to become one anyone wants to play in again.