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Wall Street's Financial Big Guns Could Face Big Cuts

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By JOE MYSAK, Bloomberg News

Published: October 24, 2007

Some day over the next few weeks, Wall Street executives are going to meet to make some bad decisions.

They are going to decide to batten down the hatches, trim away the dead wood, button up for the battle ahead - use whatever tired cliche you want. They sure will.

Some people at these meetings are going to be asked to 'pursue other opportunities.' The people who report to them are simply going to be fired.

Bank of America, the second-largest U.S. bank, on Oct. 18 said that third-quarter profits had dropped 32 percent. Chief Executive Officer Kenneth Lewis observed somewhat whimsically: 'I've had all the fun I can stand in investment banking.'

As you probably have heard, the financial industry has had a pretty nice few years. This isn't shaping up to be one of them. This is the year of subprime mortgages and structured investment vehicles and, at least for some companies, such as Bank of America, big losses on certain kinds of investments. Some companies have made cutbacks, but so far, they have been pretty minor.

What happens next is that the top brass meets and decides which businesses have been profitable and which businesses have not, and decides where they are going to spend their money. Then they cut jobs, and in some cases, entire departments.

Entire departments? Whole lines of business? Those are the bad decisions.

They will say they are redeploying their capital. Some business, they will say, no longer makes sense.

'On Wall Street, if you're making the money, you get to decide. Boys' rules. Girls' rules, too, by the way,' one banker was quoted saying in Patricia Beard's recent book 'Blue Blood & Mutiny: The Fight for the Soul of Morgan Stanley.'

What this usually means is that the company decides to spend money and hire more people in one area rather than another. In some cases, though, it means the company decides to exit a line of business entirely.

Just such a decision was made by the company then known as Salomon Bros. back in - why, can it be 1987, just two decades ago?

Yes, indeed, and I can't really allow such a significant anniversary to pass without mention. On Oct. 12, 1987, Salomon Bros. announced that after a review, it had decided to dismiss 800 employees, or 12 percent of its staff, exit the municipal bond and money-market businesses and evaluate its future space needs worldwide.

This was big news. There were something like 200 people in municipals alone, and at the time, Salomon was the leading underwriter. People shook their heads and wondered how it was possible that a company would depart a franchise business that is notoriously difficult to enter because it relies a lot on building relationships.

The answer was that underwriting municipal bonds just wasn't profitable enough. In addition, the company lost money after it pioneered buying entire bond issues on its own, without a syndicate, that summer, and interest rates rose. On several big deals, Salomon was left holding the bag. Losses were estimated to be between $50 million and $100 million.

'Only marginally profitable of late, Salomon, the nation's biggest investment house, has been hard hit by volatile trading markets and thin profits caused in part by increased competition from commercial banks in the United States and Europe,' the New York Times reported on Oct. 13. 'Facing similar pressures, several other Wall Street firms have disclosed that they, too, are taking hard looks at where to cut costs and what businesses they want to pursue.'

As I say, this was big news until approximately a week later, on Oct. 19, when the stock market collapsed, with the Dow Jones industrial average falling 508 points. People started talking about that.

Still, the Salomon departure decision resonated within the industry. Before the year was out, both Continental Illinois National Bank and L.F. Rothschild quit the municipal bond business. More firms followed, and it really wasn't until 2002, that things really began looking up. By then, it was estimated that the ranks of the business had dwindled from 20,000 in 1985, when bond sales topped $200 billion for the first time, to perhaps 10,000.

I never heard anyone at Salomon say they regretted the decision, either.

Some time over the next few weeks, securities firms are going to review their businesses and decide which have to go. The mortgage securities business and commercial paper - they don't look too strong right now. Come to think of it, municipals haven't exactly become more profitable since Solly got out of the business. Who else is expendable?

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