Layoffs expected to decimate Wall Street ranks

updated 4:41 p.m. ET Dec. 7, 2008

NEW YORK - The U.S. financial services industry is witnessing the bursting of yet another bubble. This time, it's the industry itself.

Bloated by years of frenzied growth, Wall Street banks and other firms are shedding tens of thousands of jobs and slashing entire divisions in their most drastic downsizing since the Great Depression. The moves promise to upend financial services and investment options for Americans from Wall Street to Main Street.

Those layoffs will drain New York and other cities of vital tax dollars while swelling the fast-growing ranks of the nation's unemployed. U.S. employers cut 533,000 jobs in November — the most in 34 years — including 32,000 in the financial-services sector, the government said Friday.

Saddled with heavy losses and a shriveled stock price, Citigroup Inc. last month said it would eliminate 53,000 jobs, the second-largest job cut by a U.S. company on record. Other firms plan to drop the ax on tens of thousands more, especially in areas that specialize in the risky investment products that helped ignite the financial meltdown.

"I think it's pretty clear that the whole financial sector is going to be smaller than it was," said Kevin Logan, chief U.S. economist at investment bank Dresdner Kleinwort. "It's not going to just consolidate; it's going to shrink."

Whether the bloodletting brings permanent changes to the economy is a matter of debate. But consumers will be deeply affected regardless. A leaner financial sector should lead to simpler, safer investment options as Wall Street reduces risk. But a smaller, more conservative financial sector also means smaller, more conservative lending. And that would lead to less available credit.

"We're going back to the basics," said Robert Howell, a finance professor at Tuck School of Business at Dartmouth. "The financial system was behaving like a bunch of drunks, and now it's back to sobriety. Things got totally carried away."

Through October, 130,000 financial jobs had been eliminated throughout the industry this year, according to employment firm Challenger, Gray & Christmas.

The elimination of 53,000 jobs at Citigroup — part of a 20 percent downsizing at the firm — will raise the number to around 180,000. That would be the industry's biggest yearly contraction ever.

JPMorgan Chase & Co. is shedding 10 percent of workers at its investment bank, matching planned cuts at rivals Goldman Sachs Group Inc. and Morgan Stanley. State Street Corp. said it will cut 1,600 to 1,800 jobs, or 6 percent of the investment services company's global work force.

The credit crisis is partly to blame. But so is the sector's rampant overcapacity. The U.S. financial industry historically has roughly doubled in size during each major technological innovation — railroads in the late 1800s, autos in the 1920s and the tech boom of the 1990s, for example.

As the boom years faded and financing needs fell, the size of the financial industry contracted accordingly. But when the Internet bubble burst in 2000, the sector never stopped growing. Instead, it ballooned over the past eight years to around 10 percent of the U.S. economy, puzzling economists.

"There was no reason for the industry to grow as fast as it did," said Thomas Philippon, a finance professor at New York University who has studied the financial industry's growth cycles. "The fundamentals just weren't there."

His models predict the financial sector will shrink to around 7 percent of gross domestic product, shedding $100 billion in annual wage costs. That would be Wall Street's first contraction in GDP terms since 1933, according to Philippon.

The pullback comes at a heavy cost. New York state Comptroller Thomas DiNapoli has said that over the next two years, the financial crisis could cost the state and New York City 225,000 private-sector jobs and the state and city $6.5 billion in tax revenue from the securities industry.

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For financial workers caught in the whirlwind, anxiety runs high.

"Everybody's talking about it, of course," said Oliver Bouchard, a New York-based technology specialist for Citigroup, whose stock dipped below $4 last month, before federal regulators unveiled a plan to guarantee hundreds of billions of dollars in possible losses by Citi and inject more money into the struggling bank. "People are fearful for their jobs."

Bouchard, speaking for himself and not his employer, doesn't think he'll be among those laid off but said "nobody at this moment knows what's going on."

"Everybody hopes that it will just resolve itself," Bouchard said.

So where will the next round of layoffs hit the hardest?

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