High Anxiety Among Fixed-Income Pros

The sub-prime meltdown's parade of job victims continues to lengthen, and the end isn't in sight.

Those at greatest risk are professionals working in structured finance, mortgage-backed securities, and the other bond origination and trading activities that are being blamed for Wall Street's estimated $27 billion of fixed-income write-downs last quarter. Now the concern is even these massive losses don't tell the full story of value destruction within dealers' fixed-income inventories. If banks and securities firms take additional hits in months to come, further rounds of layoffs will likely follow.

On the positive side, look for banks to beef up risk management departments, increase emphasis on markets outside the U.S., and build their wealth management franchises.

Merrill Lynch CEO is Pushed Out

A string of layoff announcements and executive shake-ups over the last several weeks was capped Monday with news that Stan O'Neal is stepping down as chief executive of Merrill Lynch. O'Neal is the highest-ranking casualty of the industry-wide plague of asset write-downs from sub-prime mortgage, leveraged loan and credit derivatives exposures. While Merrill's $8.4 billion write-down unveiled Oct. 24 was the largest on the Street, earlier this month Citigroup marked down its assets by $5.9 billion, and UBS recorded $3.4 billion damage.

Overall, the losses already have led to 130,000 job-cut announcements, making 2007 a record year for finance industry layoffs, according to outplacement firm Challenger, Gray & Christmas. While the headcount reductions first hit retail bank and mortgage company loan officers who originate home mortgages, they're now cutting a wide swath through Wall Street bond trading and deal structuring desks as well.

Merrill Lynch, which has yet to announce specific job reductions, has indicated it will shift resources from "structured businesses" toward still-profitable activities such as private equity.

At Bank of America, Ax May Swing Again

Similarly, on Oct. 24 Bank of America signaled cutbacks lie ahead in bond trading and structured finance, even while announcing 3,000 layoffs of primarily commercial banking and administrative staff from its corporate and investment bank. Brian Moynihan, B of A's former wealth management division chief who was elevated to head of the global corporate and investment bank, told the Wall Street Journal that he's now carefully weighing "how much scale" is needed in trading and more-exotic structured instruments. B of A reported Oct. 18 that $1.4 billion in mostly fixed-income trading losses slashed profit from investment banking by 93 percent in the third quarter from a year earlier, to $100 million. That inspired chief executive Ken Lewis to remark on the conference call, "I've had all the fun I can stand in investment banking."

Others recently announcing layoffs within investment banking or trading include UBS (1,500 positions), Wachovia ("several hundred" positions), Morgan Stanley (300 positions), and JPMorgan Chase (100 positions, with more to come according to chief executive Jamie Dimon).

Still, recruiter Jay Gaines says not to expect wholesale job destruction unless the banks' losses get "considerably worse." Gaines, chief executive of New York-based Jay Gaines & Co., expects investment banks to exit non-core businesses and get tough on "marginal performers" by trimming both headcounts and bonuses. He also anticipates that structured finance pros who are let go by Wall Street will find a warm welcome within buy-side firms, including debt-focused hedge funds.