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Editor’s take: Hoarding headcount

Profits are hard to come by, business levels have been halved, but banks are still pottering about on the periphery when it comes to redundancies.

The numbers speak for themselves. An additional 2,900 people to go at Merrill Lynch? That’s just 10% of the total. And what are another 9,000 job cuts at Citigroup when the investment bank employs 369,000 people worldwide?

People who’ve retained their jobs have bonuses to thank. At the average US investment bank, compensation accounts for two thirds of total costs, and 60% of compensation is typically in the form of bonuses.

Bonuses can be slashed to zero if necessary, enabling banks to eliminate 40% of all costs simply by forcing their bankers to live on salaries alone.

However, even if bonuses are reduced to nothing, the headcount cuts implemented so far will not be sufficient to offset the collapse in revenues.

At Merrill Lynch, for example, revenues were down 69% in the first quarter of the year versus the same quarter of 2007.

As much as 27% of that fall can be mitigated simply by slashing bonuses to the bone. But Merrill still needs to cut costs by another 42% if it’s to match the fall in revenues – and given staff costs account for two thirds of total costs that implies a reduction in salaries (and, all things equal, headcount) of around 28%.

Why aren’t banks grasping the nettle? One answer is that they’re in the grip of a kind of Pavlovian conditioning learnt in the downturns of 1998 and 2001 – Merrill Lynch, in particular, cut staff zealously, only to have to hire them all back at higher prices when markets improved. And who wants to do that?

With this in mind, and with banks’ CEOs publicly confident that we’re over the worst, the emphasis is still on preservation rather than decimation. Jamie Dimon said last week that JPMorgan has imposed a freeze on hiring in New York as it tries to re-house as many displaced Bear Stearns bankers as possible – rather than leaving them to freeze on the street.

Citigroup is going one step further and actively seeking new staff, albeit less enthusiastically than last year – headcount growth is currently running at 8%, down from 12% in 2007.

There were some high points to last week’s results – rates and currencies did universally well. However, what was also notable was that a crunch that began in structured credit has now impacted the equity capital markets and M&A advisory businesses that it was once hoped would remain immune.

Unless things change soon, we’re in for a lot more job cuts to come.

Comments (11)

  1. Spot on. There will be a lagged effect from this episode – there must have to be big redundancies over the next year or two.

  2. Of course comparing Q1 08 with Q1 07 is going to show up huge discrepancies in revenue for the banks, Q1 07 was the best quarter on record for almost all banks globally.

  3. by this time next year, the City will have lost in excess of 100,000 jobs.

  4. The comment about Merrill in 1998 is apt – they all but destroyed their reputation as a top place to work. Even now it’s definitely only a second-tier place, and for quite a while I would have considered it third-tier. A place to turn to after you’d turned down Bear Stearns…

  5. desmond – making statements like you have above is the very reason that you work in “Accounting”, and are not riding the IB gravy train. i am assuming that you are not a Big 4 firm partner, and never will be. i can therefore assume also that you earn fraction of what i do, and always will. you are probably better educated than i (on paper), but rather than make real decisions that can fund a fantastic lifestyle for you and your family, you check the PnL that i make each day and wince when you think that i’ll be enjoying 10% of that in my skyrocket come January. this coming January included. “100,000 jobs lost”: how absurd; 18 months from now, the whole 2007/8 “credit crunch” will be little more than a blip in an upward trend (for the right asset classes). it’ll prove to be a buying opportunity in equities and property for those who missed the lows around the start of the century.

  6. fxo man, just for your info – Job Seeker’s Allowance is 200 per month. Enjoy.

  7. dude, you’re probably familiar with the concept of pv/fv. when you’re early thirties, and have been earning a 6-figure (GBP) bonus, on top of a high 5 figure / low 6 figure base for 10 years, do you really think that we care? we’re so long cash + assets it’s untrue. literally, it’d be embarrassing having to stoop to Jobseekers, despite the fact that i’ve earned it for all my tax-paying years. on top of that, we have the fact that fx options are going (very) very strongly right now (with implied volatilities off the scale) and that even in the event of the dreaded redundancy, we could probably go and easily make 200-1,000 per DAY trading on retail index platforms (ig, cantor). i think it’s you that should be keeping an eye on benefit rates.

  8. fxo – fx operations ?

  9. you wish!

    fx options man Reply
  10. Desmond, perhaps a 1/3 cut in cost centre cost will happen one day – but only when they fix the outsource. But guess what its the bean counters and IT boys that are going to go.

    Meanwhile the FO need to invent a few more asset classes to keep the whole thing chugging along …… is it possible to hedge the hedge thats hedgin the hedge ?

    One last thing …. is it me or does trading fxo man sound a a bit like that baby off of family guy ? More power to the Peters

  11. Man, you guys crack me up! stop the bitching…

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