The Losers: Who Sank in 2008

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Who sank this year? In finance, just about everyone - which makes compiling a discrete list of "losers" something of a challenge. Instead of ranking layoff numbers or bottom-line losses, we opted for an intangible, somewhat subjective scale: how a company, individual or sector fared relative to its standing or expectations 12 months ago.

That explains why Goldman Sachs made our list despite recording a profit for the fiscal year and outperforming most peers. On the other hand, fixed-income derivatives and Citi's Vikram Pandit prove that even extremely low expectations can still be underperformed to win a niche in our 2008 hall of shame. Here is our selection, in no particular order:

Hedge Funds

They hired aggressively through 2007 and well into 2008, giving job-seekers a ray of hope in an ever-darkening financial world. By midyear, though, it was clear they weren't immune to turmoil. As markets seized up and the equity bears rampaged, hedge fund returns and assets shriveled and clients clamored to withdraw money. The Credit Suisse/Tremont Hedge Fund Index shows a 19 percent loss through November. Even if returns bounce back next year, high-water marks will block many fund managers from earning performance fees. Cutbacks at fund firms have become an almost daily occurrence, and even industry titans like George Soros and Emmanual Roman predict at least a third of today's funds will disappear.

Goldman Sachs

Imbued with a godlike aura following 2007's dazzling results, 2008 saw Goldman dragged back to earth. It reported a profit for the year but suffered its first losing quarter in a decade as a public company, and its share price dropped below the 1999 IPO price. Adding insult to injury, Goldman's image took some (undeserved) hits over its ties to the Bush Treasury Department, headed by ex-CEO Hank Paulson. Some employees must have been disappointed, too: Company-wide compensation and benefits fell by half from 2007. And Goldman laid off 10 percent of its workforce during the fourth quarter.

Credit Rating Firms and Their Employees

The credit crisis dealt the rating industry's reputation what could be an irreparable blow. First, their models for analyzing structured credit risk failed miserably. Then their honesty was called into question when e-mails surfaced reminiscent of the 1990s equity research scandals. (We imagine a managing director e-mailing an analyst: "I don't care what the models say about the deal you were asked to rate. Find a way to put lipstick on this pig - or else!" You get the idea.) Rating agencies' responsibility for the credit debacle adds to earlier concerns about the integrity of their basic business model, in which issuers pay for their own ratings.

Vikram Pandit

Expectations for the man who succeeded the disgraced Chuck Prince as CEO at flailing Citigroup were never high. But even with the bar placed charitably at waist-level, Pandit managed to perform comfortably beneath it at all times. A lowlight was his memo inviting employees to a Town Hall meeting. "I want to talk with you about our accomplishments," he wrote reassuringly. "I continue to be optimistic about the future...we have abundant liquidity, and ... the most talented people in the industry." At that very Town Hall meeting on Nov. 17, Citi revealed it would slash 52,000 jobs - one of the largest one-time layoffs ever announced by any company.

The Tax-Exempt Bond Business

First came the collapse of auction-rate securities, widely used by municipal debt managers. Then came credit downgrades of the leading bond insurers. But it was the Lehman Brothers bankruptcy and its aftermath - chronic chaos in bond markets and worsening recession - that finally crippled municipal debt trading and issuance. Yields on tax-exempt bonds ballooned to levels twice as high as taxable Treasuries. Municipal bond sales from September through November plunged 42 percent year-over-year. Suddenly unable to plug budget gaps by tapping public debt markets, state and city treasurers are being forced to tell governors and legislatures the unthinkable: raise taxes or curb spending.

Fixed-Income Derivatives

This sector got hammered so hard in 2007, it seemed there wasn't much downside left. Wrong. This year it's become evident the manufacture of tranched instruments, from relatively new-fangled CDOs to long-familiar CMOs, will never regain its former heft - not even when banking's next up cycle is well under way. A handful of cashiered CDO bankers have reinvented themselves as managers of distressed debt portfolios. But the majority - along with legions of structurers and other lower-level players - face the challenge of finding new careers.

Investment Bankers

Most major deal types dried up - buyouts, stock and bond offerings, and structured debt. They aren't expected to revive soon. Leverage is dead, and even the strategic corporate mergers that kept some bankers busy through much of 2008 may wither if the economy stays in a funk much longer. Just about the only action left is arranging fire-sales of mortally wounded financial institutions to less-mortally wounded rivals, or to governmental bodies.

Proprietary Traders

As banks overhaul their business models, "prop desks" are a strategic casualty. Reduced leverage, risk-based budgeting and bonus reforms that defer rewards for short-term trading gains, are among key measures banking leaders and regulators are adopting to avert future crises. All work against proprietary traders who are paid to bet the house's money. One recent illustration: Morgan Stanley, which had remained committed to prop trading earlier in the downturn, named proprietary trading and principal investments among areas targeted for reduction in last month's 10 percent cut in its institutional securities staff.