Pink slips rain down on Wall Street traders

VIEW FROM WALL STREET

The market is soaring, the tulips are out in Battery Park and a few brave souls on Wall Street are daring to smile.

With spring, they are hoping to banish the memory of a winter of chilling blizzards - not of the white stuff but of pink slips - the notices American workers get when they are laid off.

Winded by the steep downturn of 1994 - Wall Street's annus horribilis - all the topsecurities firms have taken the axe to their own employees, slashing their workforces worldwide from 5 to 15 per cent, and seeking otherwise to cut costs and compensation.

And while the worst may be over, the tremors and the lay-offs are still going on. By some estimates, one in ten people in the securities business in New York will be out of a job by the end of the year.

While the crash of October 1987 was immediate, what happened to Wall Street in 1994 was more gradual and insidious. Only during this winter did the full awfulness of the slump emerge. The Institutional Investor recently noted that "more wealth was wiped off balance sheets than in any other stock market debacle since the crash of 1929".Combined pre- tax earnings of the members of the New York Stock Exchange tumbled to $1.2bn (£75m) last year compared with $8.6bn in 1993.

Triggering the massacre was the series of interest rate rises introduced by the Federal Reserve since February last year, as it manoeuvred to avoid an overheating of the US economy. The ascending rates were especially bad news for fixed-income bonds.

Business nosedived while several houses found themselves lumbered with huge inventories that became ever more difficult to unload. For bonds, 1994 has gone down as the worst year on record. Meanwhile, 1994 offered much else that everyone would rather forget, including the Orange County derivatives disaster.

The debacle is forcing the big firms to rethink their strategies, protect their share of an increasingly crowded market and - above all - to cut expenses.

Perrin Long, an analyst with Brown Brothers Harriman, says: "Everybody is scrambling to try to get themselves organised and focused in the direction they think they should be going, and it's difficult for them," . Among the common concerns is that they have moved too fast into foreign markets.

No firm among the big players is immune. Even the venerable Goldman Sachs, the last big partnership on the Street, moved to shed 1,000 jobs this winter, on top of 500 cut last autumn. The mighty Merrill Lynch cut away 500. CS First Boston, reporting 1994 profits down by half compared with 1993, confirmed it was paring its workforce by 15 per cent and closing down operations in one badly hit area, municipal bonds.

And according to Howard Gabel, president of the Wall Street recruitment firm, GZ Stephens, the haemorrhaging goes on. "People are still leaving firms voluntarily or less than voluntarily, and the firms are still getting leaner, no question about it", he said. And once you are shown the door, the prospects for finding new employment are not good. "It is very hard because the contraction is occupation-wide," Mr Gabel added. "I don't know what people will do. Some will do other things with their lives."One thing more: if you do find safe harbour, you may not earn as much money as you did before.

By revealing especially dreadful results and by attempting to pioneer a less generous pay structure, one firm - Salomon Brothers - has recently generated more headlines than anyone on Wall Street.

Salomon admitted that its performance in 1994 was "awful", with an overall loss for the year of $399m. It was the first time that the firm had failed to produce a profit since it went public in 1981.

Among the measures taken to remedy the situation were the closure of the private investment department catering for wealthy individuals and a 5 per cent reduction in its workforce. Much more controversial, however, has been the effort to reform pay structures, which was begun last October by its chief executive, Deryk Maughan. Designed to link traders' earnings with the overall performance of the company - rather than just the results in their own departments - the initiative promises to cut the fixed pay of some traders by two thirds.

The move was backed by Warren Buffett, the Omaha-based investor who holds 20 per cent of the voting rights of Salomon acquired when he saved it from oblivion after a 1991 bonds-trading scandal.

Faced with mass defections by some of its key managers, Salomon was forced in mid-April to relent a little, by creating a new fund to finance special rewards for some traders who perform better than the overall profits of the firm suggest. But management is apparently still determined that its reforms will stick over the longer run.

"If we are not willing now to accept the responsibility for raising the returns of our business, when will we?," Mr Maughan asked.

Some analysts believe that Salomon will not only survive its current adversity but that it may provide a more sane model for staff compensation that the whole industry will copy.

Meanwhile, it is more than blossom that is brightening the outlook on the Street. Retail securities firms, such as discount brokers Charles Schwab, are booming: merger and acquisition activity has been rising strongly for several months.

Most importantly, the evidence is that the Fed may now have done all it needs to to calm the economy. Mr Long of Brown Brothers Harriman expects at least that this year will be better for these securities firms. He predicts earnings of the NYSE members to total somewhere around $3.5bn, which is roughly midway between what they recorded in 1993 and in 1994.

For those with the pink slips, it might be worth waiting a while. Wall Street could be rehiring before long.