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WALL STREET RECORKS THE BUBBLYAfter a seven-year securities-industry bonanza, the party's overFor almost seven straight years, Wall Street has been raking in the big bucks. Contractors from Connecticut to the Hamptons are scrambling to build handsome stone mansions, while New York-area car dealers can't keep enough BMW convertibles in stock to meet demand. All this courtesy of a cascade of fees and commissions. The question now: Is this party over? The answer is a resounding yes. The stock market's drop has crushed brokerage stocks, with the biggest firms down 25% to 45% from their 1998 highs. And many of Wall Street's biggest firms are more than 30% owned by employees. Driving those stocks down is the fear that more losses from Russia and other emerging markets may be announced. Equally worrisome is that another Wall Street engine--the debt- and equity-underwriting markets--has ground to a halt in response to market volatility. Only one IPO has been launched since Aug. 24, and 10 were withdrawn in the past month, says analyst Randall Roth of the IPO Plus Aftermarket Fund. ''There is underwriter rubbernecking. Everyone is stopping to look at the carnage,'' he says. The result? Expect the securities industry to shift into retrenchment mode, with cuts in bonuses and layoffs. ''It's a reasonable thing to get prepared for a tough environment,'' says James Dimon, co-chief executive officer of Salomon Smith Barney, which just announced a $150 million net loss from its Russian and emerging-markets businesses. London will get hit first. ''You won't see layoffs here for a bit because U.S. staffs are relatively lean,'' says headhunter Joan Zimmerman at G.Z. Stephens. Still, at 289,300, the securities industry's 1998 head count has passed its 1987 high of 260,000. As a harbinger of tough times in the U.S., local securities firms from Moscow to Jakarta are cutting jobs. Rumors are rife that Credit Suisse First Boston will shrink its 320-employee Moscow office. Fears about Russian debt have already hurt prices in larger fixed-income markets, including corporate and mortgage-backed bonds. So despite the rally in treasuries, the value of investment houses' bond inventories has fallen. ''It will be very difficult for firms to make money in fixed income,'' says Salomon Smith Barney brokerage analyst Guy Moszkowski, who just cut target prices for Merrill Lynch & Co. and Morgan Stanley Dean Witter by roughly 15%. The industry's two bellwether deals are also in question. One rumor is that the Travelers-Citicorp deal may fall through. Travelers' stock has plummeted to $44.50 a share from $73 when the deal was announced on Apr. 6, while Citicorp has dropped from $180 to $108. And the market correction could force Goldman, Sachs & Co. to postpone its IPO of part of the firm. Goldman, Travelers, and Citicorp say they have not changed their plans. HE WHO HESITATES. Certainly, Goldman fiddled while Rome burned. After years of deliberation, the firm finally decided to go public in June. At the time, competitors Morgan Stanley Dean Witter and Merrill Lynch were trading at more than 3.5 times book value. But with today's lower valuations, Goldman's price tag drops from $22 billion to $17.4 billion, ''reducing Goldman's IPO price and the take of Goldman partners,'' says Michael Flanagan, an analyst at Financial Service Analytics. There are bright spots. Some 50% of Charles Schwab & Co.'s revenues come from mutual-fund fees, not to mention trading commissions. Chairman Charles R. Schwab expects trading volume to come down 15% to 30%, but even so, ''the third quarter is looking quite robust'' for his firm, he says. The M&A businesses should stay strong, too--but some deals could fall apart. For example, Proffitt's Inc. agreed to buy Saks Fifth Avenue for stock, but now Saks can walk away since Proffitt's stock has fallen to $23 a share, below the deal's collar of $30.52. Proffitt's says the deal will close in September. It's unlikely that seven fat years will be followed by seven lean ones. But contractors and car dealers beware.
By Leah Nathans Spiro in New York, with bureau reports RELATED ITEMS
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Updated Sept. 3, 1998 by bwwebmaster
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