Was Wall Street's recent wobble like a sailboat brushing a soon-forgotten piece of flotsam? Or is the hull punctured and taking on water like the Titanic?
On the one hand, investment professionals should brace for year-end layoffs and substantially fewer job opportunities over the course of 2008, warns Wall Street compensation consultant Alan Johnson.
On the other hand, any slowdown will likely be confined to a few areas within fixed-income, counters Brad Hintz, a widely quoted bank industry analyst at Sanford C. Bernstein.
Headhunters for banks and hedge funds nod in agreement with Hintz. Another recruiter paints a picture somewhere in between.
Experts differ even about Wall Street's current hiring pace. "Demand broadly is still pretty high for people," says Jay Gaines, chief executive of search firm Jay Gaines & Co. "If the crisis worsens, that may affect demand. (But) the broader financial institution hiring market at senior levels remains active and healthy." Gaines has active searches going on even in the mortgage field, the epicenter of the recent tremors.
Johnson, however, says several of his clients have frozen hiring for now. "One shoe has fallen; there are other shoes that could fall either not at all or pretty soon," he says.
While mass media obsess over the outlook for the Dow and other market indicators, our concern is how recent turbulence might affect the hiring plans of investment banks and hedge funds. Those plans are driven by how much business and profits the industry's leading firms expect to pull in over the next few quarters.
The Bear Case
That's why Johnson, managing director of compensation consulting firm Johnson Associates, sounds so gloomy. He expects this summer's sub-prime and leveraged credit meltdowns to have a delayed impact on bank revenues and profits across a range of business segments. M&A fees, for instance, will remain relatively healthy through the remainder of 2007 as banks work off a backlog of deals signed earlier this year, when credit was available on easy terms. But with stiffer loan terms likely to crimp private equity-led buyouts, Johnson expects far less M&A activity during 2008.
"If things don't pick up, they're going to put a very tight rein at least on U.S. hiring," he says. Banks are entering their annual budgeting period, which roughly coincides with the start of campus interviewing season. While banks will continue expanding internationally, Johnson expects them to reduce headcounts in the U.S. - beginning with layoffs around the end of this year.
That would put an end to 2007's candidate-driven job market. "With hiring declining, the leverage is going to move from the employee to the company," says Johnson. He expects hedge funds to pull back as well, making it harder for portfolio managers to negotiate big guaranteed pay packages for jumping between funds or defecting from Wall Street.
Burke St. John, head of the global financial services practice for worldwide executive search firm CTPartners, takes a middle view. He says Wall Street hiring is on hold and will probably resume at a slower pace than earlier in 2007, as firms selectively expand "strategic" segments such as prime brokerage. "I think we'll see less of the 'me-too' hiring. If there are strategic needs, they're still going to be met. But you're not going to see incremental hiring if they're already being covered." He adds that "the spigot can be turned back on quickly," if business conditions improve.
The Bulls' Case
Other experts we spoke with see far less job-market damage from the turmoil that's beset mortgage and credit markets since mid-June.
"It doesn't look like we're at a 2001-2002" situation of a broad downturn in the economy and stock market, says Sanford Bernstein's Brad Hintz. That's the kind of environment in which bank profits plummet and firms respond by slashing staff, he says.
Instead, Hintz believes, "what we have is a re-pricing in the fixed-income markets ... The impact is going to be very focused in debt capital markets and debt trading."
Instead of across-the-board cuts, he says reductions will be made "with a scalpel." He cites Lehman Brothers' Aug. 22 move to shut its sub-prime lending subsidiary and lay off 1,200 workers. Meanwhile, Hintz sees other important business segments, like M&A and retail brokerage, remaining robust. He says a senior Merrill Lynch executive told him recently that Merrill plans to continue expanding its retail broker force.
Recruiters specializing in the hedge fund sector say they've seen no slowdown in hiring, except for sub-prime mortgage traders.
Hedge funds' need for accounting and operations staff continues to exceed the supply of good candidates, says George Yulis, principal at Rothstein Kass Executive Search Group. Yulis says his clients - who include some firms cited in news stories about quant blowups - aren't cancelling their job orders. "Not a single one of our quant funds has slowed down our hiring," he says.