Wall Street’s Shift from Investment Banking Model Will Lower Industry Profits

The financial crisis could cost New York State and New York City 225,000 jobs and $6.5 billion in securities industry-related tax revenue over the next two years, according a report released today by New York State Comptroller Thomas P. DiNapoli. The Comptroller noted that the Governor and Mayor have been proactive in dealing with the crisis, but New York, like other states, may require federal assistance given the magnitude of the projected budget gaps.

“Wall Street is the engine that drives the economies of New York State and New York City, but the global credit crunch has slowed that engine down,” DiNapoli said. “This year is on pace to be one of the worst years ever on Wall Street. Through the first half of this year, broker dealer operations of New York Stock Exchange member firms reported a loss of nearly $21 billion.

“These numbers are translating into job losses. The securities industry in New York City has lost more than 16,000 jobs and the industry could lose a total of 38,000 jobs by next October, with another 10,000 jobs lost in banking, insurance and real estate. And those job losses translate into more job losses in other industries.

“The financial crisis highlights the need for greater transparency and oversight, but there has to be a balance. Overregulation could hurt the securities industry, which is vitally important to the State and the City.”

“This important report captures the substantial damage inflicted on New York by the collapse of global financial markets and underlines the importance of stabilizing the banking system in order to maintain our position as the world’s financial capital,” said Kathryn Wylde, president & CEO, Partnership for New York City.

Over the past year, the securities industry in New York City has lost 16,300 jobs. DiNapoli predicts the securities industry could lose a total of 38,000 by October 2009 and another 10,000 jobs could be lost in banking, insurance and real estate. The Comptroller estimates total private sector job losses could reach 175,000 in New York City but losses could be greater if the economic downturn is deeper and longer than currently forecast. In total, New York State could lose 225,000 jobs during this period.

According to DiNapoli, while top executives may not receive bonuses, lower level employees will still receive payments although the size of the bonus pool will be much smaller than in prior years. In the early 2000s, bonuses fell by 50 percent over a two-year period in the years following the bursting of the dot-com bubble and the events of September 11, 2001. According to the Comptroller, recent developments suggest that a decline of a similar or even greater magnitude could occur this time. By January of each year, the Comptroller issues an estimate of cash bonuses paid in the prior year.

“Top Wall Street executives ought to forego bonuses during this difficult time; it’s inappropriate to reward poor performance,” DiNapoli added. “But the public must keep in mind that bonuses paid to lower level employees are often used to purchase goods and services in other industries, which benefits the overall economy. New York will feel a lot pain from a shrunken bonus pool.”

The DiNapoli report also found:

• Broker/dealer operations of New York Stock Exchange member firms reported near record profits of $20.9 billion in 2006 but a record loss of $11.3 billion in 2007. These firms reported a loss of $20.7 billion in the first half of 2008 and New York City’s financial plan projects a loss of $25.5 billion for the entire year, but the Comptroller’s report warns that losses could be even greater.
• Securities industry revenues fell from $70.3 billion in the first half of 2007 to $32 billion in the second half of 2007. According to the report, total compensation averaged an unsustainable 97.4 percent of net revenues for the first half of 2008 (compared with an average ratio of 53 percent from 1990-2006).
• For the six largest securities firms headquartered in New York City, revenues fell by 63 percent in the second half of 2007 and by another 48 percent during the first three quarters of 2008. These firms reported write-offs of more than $140 billion during this period.
• As Wall Street contracts, the Comptroller estimates that jobs will be lost throughout the rest of the City economy due to the industry’s multiplier impact on jobs. DiNapoli’s multiplier effect estimates that for each financial sector job lost, two more jobs will be lost in other industries in New York City and 1.3 jobs will be lost elsewhere in the State.
• During the 2001-2003 recession, New York State lost 329,600 private sector jobs, of which Wall Street directly and indirectly contributed a loss of 173,500, or more than half of the decline. New York City lost a total of 232,100 private sector jobs during this period.
• The average securities industry salary reached a record high of nearly $400,000 in 2007 paying approximately 6.8 times the salary of all nonfinancial jobs in the City. Salaries averaged $150,640 in credit intermediation and insurance and $62,060 in real estate and related industries.
• Tax collections (personal income and business taxes) from Wall Street-related activities could drop by $4.5 billion for New York State and $2 billion for New York City by 2010. Wall Street activity generates a disproportionate share of State and City tax revenue because of high levels of compensation, profitability and capital gains.
• Wall Street-related activities account for 12 percent of New York City tax revenues and up to 20 percent of New York State revenues. Prior to the current crisis, the securities industry accounted for five percent of the City’s employment but nearly 25 percent of the wages.
• Hedge funds and private equity firms, which have also been hit hard by the crisis, play an important role in the securities industry and have a strong presence in New York City. According to a survey of large hedge funds and private equity firms conducted for the Comptroller by The Partnership for New York City, respondents leased nearly 1.5 million square feet of office space in New York City and paid more than $100 million in unincorporated business taxes to the City.

Click here for a copy of the report or visit http://www.osc.state.ny.us/osdc/rpt7-2009.pdf.