What would a recession portend for Wall Street job opportunities and career paths? Something a good bit uglier than what's happened lately.
PIMCO's Bill Gross, king of the bond mavens, says the U.S. is already in recession. So does David Rosenberg, chief economist at Merrill Lynch. And Goldman Sachs, in a research note reported Wednesday, says, "The latest data suggest that recession has now arrived, or will very shortly."
It may seem like the now-widely anticipated recession has already worked the lion's share of its damage on Wall Street. After all, financial companies announced a record 153,105 layoffs last year, according to Challenger, Gray & Christmas - 31 percent more than the previous peak set during the recession year of 2001. The AMEX Securities Broker/Dealer index of bank share prices has plummeted 34 percent from June 1 through Wednesday's 52-week low. Investment firms have slashed book values of mortgage bonds and other debt securities by a collective $80 billion and counting. Now, with their balance sheets in tatters, they're running to Arab and Chinese sovereign wealth funds for equity injections.
But if indeed we're entering a recession, the worst for Wall Street jobs is still to come. Cutbacks in headcounts and business operations thus far have been narrow and shallow, largely confined to mortgage origination and securitization. Even other fixed-income activities haven't suffered deep cuts.
Now there are reports that commercial mortgage-backed securities might start defaulting. And if the December spike in unemployment continues, consumer credit card debt - the assets underpinning another huge reservoir of structured-finance bonds - could crumble the way mortgage debt did. That would deal Wall Street yet another body blow.
Equity Downturn Would Be Most Damaging
Most of all, a recession would pull down the asset class that's done the most to cushion investment bank profits: equity trading, equity underwriting and deal-making.
A recession and accompanying equity bear market would damage Wall Street far more than a typical credit downturn. It would slam underwriting and M&A business, Brad Hintz, brokerage firm analyst at Sanford C. Bernstein & Co., told us last August, when he and most other participants still believed the storm would blow over before the end of 2007.
A sustained downturn in equity prices would also put a damper on asset management and private wealth management - two activities that defied the credit turmoil roiling securities and trading businesses. Emerging markets, another refuge thus far, could suffer as global investors shy away from risky assets.
If a recession is indeed upon us, expect widespread and lasting hiring freezes, waves of layoffs, cuts in all manner of perks and incidental expenses, and further scaling back of next year's bonus expectations. Where openings do exist, candidates will enjoy far less bargaining power than they've gotten used to in recent years.
Benchmarking Job Destruction
What sort of scale are we talking about? The recession that followed the burst tech-stock bubble earlier this decade vaporized 90,000 jobs in the U.S. securities industry, including 41,000 jobs located in New York City. By August 2007, securities industry employment nationwide had swelled back by 97,600 jobs, reaching a high of 849,600. Industry headcount in New York recovered 35,800 jobs, reaching a total of 194,800. (Those are Bureau of Labor Statistics numbers, presented in SIFMA's 2007 year-end employment update.)
Taking the New York City figures as a template, a similar percentage decline in Wall Street's work force would lead to a loss of about 39,000 jobs from the recent peak. Excluding retail mortgage lending, investment firms' announced layoffs to date total less than 10,000. Even allowing for job cuts that have never been announced, it's a good bet the total damage thus far is at most half of what occurred during and after the last recession. In other words: many more will lose their jobs in the months ahead.
Where to Seek Refuge
Which business segments and skill-sets might do better in a recession? Distressed debt investing - largely the province of specialized hedge funds - is one sure beneficiary. Short selling of stocks, another hedge fund specialty, can be expected to pick up, too.
Both markets and jobs outside North America are expected to hold up better than the U.S. if recession is here. But the job outlook overseas, especially in the still-buoyant Asian and Middle East markets, depends on how well those economies are able to "decouple" themselves from the U.S. That question is sparking intense debate among economists right now.
Do you think recession is in the cards for the U.S.? If so, are you taking any steps now to protect your job or career path? Share your thoughts and your plans below.