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Our Take: Recession?

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.

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AUTHORJon Jacobs Insider Comment
  • Ba
    Backspan
    28 January 2008

    I'm probably preaching to the choir, but.......

    We are headed for a sharp recession. The clue
    came from the stark change in interest rate
    spreads in July/August 2007. The adage goes
    if Wall Street catches pneumonia, then the
    economy goes down for the count too. The
    typical lag time for financial pain to show
    up in economic data is 6-9 months. Therefore,
    the data should corrupt right about......Now.
    Anyone who thought that the December jobs
    data was an aberration, is in for a rude
    awakening. Things are going to get worse
    before they get better. Witness the fantastic
    performance of the Stock Market. The cue
    has been sent for the Bear to show up in 5.
    This Grizzly might make an early showing.

    I'm just praying that finance in corporate
    America, rather than Wall Street, fares
    better in the months ahead. Corporate
    profits look decent..........for now.

    Stay tuned for the latest disaster coverage.

  • Ch
    Chris
    24 January 2008

    Check out the Philly Fed data on xls, with monthly growth index data by state since the 1970s. Great stuff. Those that predict 2008 contraction lasting for only 6-8 months are probably fooling themselves. Of course, going to Tom's comment that Roach says recession has been here since 1976, well he's got a point looking at the aggregate macro level for income and price stability (what about technology inflation?), but it's that's more of a detailed technical definition of recession - here we're talking about measured index contraction. So, although I can agree with Tom, possibly well hidden recession since 1976, I choose to go for ther more trad. definitional view, and would say Roach's comments have more to do with the aggregate structure of economy and policy.

    Peace out ...

  • Jo
    Jon Jacobs
    17 January 2008

    Tom, while our industry certainly has its perma-bears on the economy - Merrill's Rosenberg being one of the most prolific - today, a growing number of respected economists who don't fall into that category also view a recession as likelier than not. I notice on another blog you characterized PIMCO's Gross as "....so wrong for so long..." Yet his picks made him the top bond fund manager of 2007 according to Morningstar, which gave him its Fixed-Income Manager of the Year award for an unprecedented third time. He must have made some good calls. As for our "thought process," my present role is that of a reporter - I'm not here to critique economists' forecasts. (But, for what it's worth, my personal view is that a recession is likelier than not. I adopted that view the day before the December nonfarm payrolls, which made me relatively late to the recession party, I think. And regarding future Fed action, I'll endorse what Greenspan said back in 2000-01: If a recession's coming, all we can do is mitigate it; we can't prevent it.)

  • Th
    Thomas L Kenny
    17 January 2008

    Oh, please. Redo your thought process..Gross, Rosenberg, Natzius, Roach et al have been saying we have been in a recession since 2005. Let me correc that, Roach thinks we have been in a recession since 1976...

  • Da
    Davis
    13 January 2008

    Years and years of easy money as part of the bull-run, people piling on trades. Easy to do well in a bull market. Thousands and thousands of lazy just-lets-get-paid-for-sitting-around types. Now the crunch has come.

    Enjoy.

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