More cuts loom in 2003

Although markets began declining in the second half of 2000, redundancies did not really begin in earnest until 2002, says McWilliams. Globally, up to 10,000 financial services jobs were lost in October alone.

The number of people passing through Bank Underground station in the City of London illustrates the depth of the cuts. At the peak of the market in 2000, nearly 79,000 people used the station on an average weekday. In 2001 that figure fell 2.5%, to around 77,000. In 2002 it fell a further 8%, to less than 71,000.

There may be more cuts in 2003: McWilliams predicts another 10,000 job losses in the City of London. Armstrong International, a headhunter, forecasts that investment banks will cut their European investment banking divisions to between 250 and 300 people. Aidan Kennedy, an Armstrong director, says with the exception of Credit Suisse and Lehman Brothers, few were near that level in December 2002.

The situation at the end of the year was a far cry from the optimism expressed by some firms halfway through. After cutting staff by 10% from the peak of the cycle, Stephen Crawford, chief financial officer at Morgan Stanley, hoped the worst was over. "With our belief that the second half is going to be somewhat better than the first, we're not anticipating material changes to headcount," he said in June. Morgan Stanley announced a further 2,200 redundancies in November.

Some sectors suffered more redundancies than others. With M&A volumes down nearly 70% from the peak levels of 2000, corporate finance continued to bear the brunt of cuts. By the end of 2002, Sheffield Haworth, the headhunting firm, estimated that corporate finance departments in bulge- bracket firms were half their 2000 size.

Equity researchers also suffered after claims that they were compromised by links with clients buying advisory services. Oliver Dent, a consultant at search firm Longbridge, says research teams were cut by more than a third in some organisations. After a bumper start to the year, fixed-income areas such as debt origination were also hit by redundancies; new issuance plummeted from the second quarter.

The knife went in deeper at some banks. Having made large-scale cuts at the end of 2001, Merrill Lynch escaped the worst of the carnage in 2002. Others were not so lucky. Credit Suisse First Boston made purchases near the top of the cycle; there was wholesale bloodletting as the value of the new assets plunged.

By October 2002, John Mack was estimated to have made 6,500 redundancies since his arrival as chief executive at CSFB in July 2001. Cuts at JP Morgan Chase went further. In October, Bill Harrison, chief executive, said the bank had made 9,000 redundancies in the investment banking division since the merger between JP Morgan and Chase Manhattan took place at the start of 2001, a cut of 36%. A further 2,000 job losses were announced for the end of 2002.

German banks were also hit hard. Peter Nerby, senior vice-president at Moody's, the ratings agency, says: "German banks have been making returns far below what their shareholders expect."

For the first half of 2000, return on equity was below 5% at Deutsche Bank, Dresdner Bank and Commerzbank. In its third-quarter results, Allianz, owner of Dresdner Kleinwort Wasserstein, described the bank's performance as "totally unsatisfactory". Plans to eliminate 2,000 jobs ensued.

Christopher Ellerton, an analyst at UBS Warburg, says second-tier banks have suffered from excess capacity. "When the market shrinks, what is left gravitates to the big players," he says.

Lopping off entire limbs may be the only course of action for smaller competitors inappropriately overstaffed from the bull market. John Romeo, a director at the financial services strategy consultancy Oliver Wyman, says second-tier banks are best suited to niche markets and to particular geographical areas.

Some organisations were coming to the same conclusion. Société Générale made hundreds of redundancies in October, severely curtailing its wholesale banking activities outside Paris. Kim Fennebresque, global head of investment banking, admitted SG's European expansion strategy was flawed.

Nevertheless, some firms continued to recruit staff. Most notably, Lazard took advantage of the tide of high-quality people coming on to the market. Managing directors at Lazard swelled by 10% in 2002 and may grow by a further 5% in 2003. It is thought the firm may be seek to expand its European equities division by between 30 and 50 people in the next few years.

In 2001, Lehman Brothers increased global investment banking staff by 11% and European headcount by 17%. However, in November 2002 the firm said it was making 4% of its staff redundant. Future cuts remain possible.

In the second quarter of 2002, Thomas Patrick, chief financial officer of Merrill Lynch, said the bank had 30% to 40% excess capacity in investment banking and trading. Unless things pick up, this may yet be eliminated; other banks would undoubtedly follow suit.