When Goldman Sachs' CEO Henry "Hank" Paulson Jr. told investors on Jan. 28 that 15% to 20% of his people provide 80% of the value in his investment bank's work, he triggered wide speculation that another round of layoffs was in the works. The speculation was soon confirmed. On Feb. 7, the firm announced that it's cutting roughly 20% of its 220 options traders because of the poor business environment.
Goldman Sachs isn't alone. Veteran Wall Street compensation consultant Alan Johnson of Johnson Associates says other investment banks are also preparing for yet another round of layoffs this spring. Johnson spoke with BusinessWeek Finance & Banking Editor Emily Thornton about just how bad the carnage could be. Edited excerpts of their conversation follow:
Q: How much more cutting do you think investment banks will do?
A: Layoffs aren't over by any means. Firms are going to be reducing their head counts by between 5% to 10% [over the rest of 2003]. The layoffs will happen in April or May, after the first quarter is over for most firms. That means investment banks will be down 25% from their peak in 2000. Our clients now accept that there will be more [reductions].
Q: Why is this still happening?
A: In hindsight, firms got too large, and the industry expanded too much. They hoped that by now you would be seeing significant improvements, but it isn't true.... The [investment-banking] business just isn't getting better.
People are concerned about how bad 2003 could be. The view was that 2002 was the bottom, that it was as bad as it could get. Now people can come up with any number of scenarios where it could get a lot worse. Interest rates go up. A credit crunch. A nasty little war.
Q: How will this next wave of layoffs be different from previous waves?
A: This round will be more focused. Firms believe they've already cut into the marginal performers. This time, they'll make some strategic changes and will get out of certain businesses.
Q: We're already seeing firms exit some businesses.
A: There will be other changes. People will look at whether they should have offices everywhere. A lot of clients are looking hard at back-office costs.
Q: Over the last several years, we've seen investment banks increasingly try to bundle more services. Do you see a reverse in this trend?
A: The mantra three to four years ago was that only six firms will survive. Now, we look back and say that's not true. And do we see any correlation between being the most humungous and the most profitable? Not necessarily.
The conventional wisdom [now] is that you don't need to be a giant firm to survive. [Yes,] you need to be a certain size, but you don't need to be in every country and in every business to be successful. That's a huge change in mindset.
Has there been a single merger that was a big success? Most people believe they've been disappointments. The trend among clients is to have a longer list of financial-service providers. With all of the scandals that have happened and the disruption, most firms would feel silly to have a single provider of financial services. It's hard to see how clients of major brokerage firms will say I only want a single source of information.
Q: Do you think the next round of layoffs in April will be the final round, or could there be even more if the economic situation worsens?
A: I think the general view is that death by a thousand cuts is very unproductive. I would hope that in April or May people will go at it for the last time. It's terrible for morale.