Wall St. movers feeling a pinch
Until a few weeks ago, life on Wall Street was as good as it gets, with a nearly 5-year-old bull market, takeover deals galore, record profits and jaw-dropping bonuses. America’s financial princes once again lived up to their image as Masters of the Universe.
But after a market upheaval that has hit like a bad case of whiplash, the fear on the Street is that the good times are coming to an abrupt halt.
Many of the premier names in the Big Apple’s financial core are on the defensive as their own stocks have tumbled by as much as a third on the expectation that their revenues and profits could sink. Some of these firms have been stuck with billions of dollars in risky debt used to finance corporate buyouts because investors have been unwilling to assume the loans.
And if Wall Street hoped the Federal Reserve would come to its rescue by cutting interest rates, the central bank Tuesday gave no sign it was entertaining such a move -- even if it would also benefit anyone with a recently shrinking 401(k) account.
“The next 12 to 18 months on Wall Street could be an extremely trying period,” said Richard Bove, an analyst at Punk, Ziegel & Co.
The reversal of fortune stems from the meltdown in the market for sub-prime mortgages -- home loans taken out by people with poor credit. During the housing boom, Wall Street firms made huge sums by buying pools of home loans, in effect turning them into bonds and selling them to big investors.
But with home prices now falling and mortgage delinquencies soaring, the demand for such securities has fallen off a cliff, drying up funding for sub-prime lenders and even some mortgage firms that hadn’t touched the sub-prime sector. That has sparked a crisis of confidence in the corporate-bond market, ending an era of easy money that fueled Wall Street’s fortunes.
Investors, rattled by fears of potentially broad economic damage and no longer able to count on a wave of easily financed corporate takeovers to pump up share prices, have yanked the stock market down from its record highs of less than three weeks ago.
No firm has been harder hit than Bear Stearns Cos.
Founded in 1923, the company had a reputation for being able to control the risks it took, especially in its specialty of trading mortgage-backed securities and other bonds. But it may have taken on too much risk when it created a unit to manage hedge funds, lightly regulated investment pools of money raised from institutional investors and rich individuals.
Two such funds, which borrowed billions of dollars to buy securities backed by sub-prime mortgages, collapsed last month. A co-president of Bear Stearns became the highest-level casualty of the unfolding sub-prime fiasco when he was forced out of his job last week. Bear Stearns shares are down 32% from their January peak.
The stocks of other big Wall Street firms are also down sharply from their highs this year. Lehman Bros. has fallen 29%, Citigroup is down 14% and Goldman Sachs Group is off 18%.
The standstill in the bond market has threatened to derail a boom in private equity, a field in which investment firms use mostly borrowed money to buy companies with the hope of profiting by cashing out years later. Many firms have had to rework their planned financing and pay higher interest rates to complete deals. The number of companies able to sell junk bonds, many of which are used to pay for buyouts, plunged into the single digits in July from about 40 in June.
Shares of private equity giant Blackstone Group, which sold a stake to investors in June, have plummeted 20% since the initial public offering.
Private equity firms have been known to make their money in part by chopping payrolls of companies they acquire, so for workers fewer buyouts may not be such a bad thing. On the other hand, private equity investors have stepped in to keep some struggling companies afloat. So a drop in buyouts also could threaten some workers’ jobs.
Firms that manage hedge funds could also face a contraction stemming from the sub-prime woes. Like the two Bear Stearns funds, many are likely to have suffered losses on mortgage-backed debt. In some cases, the losses have been big enough to lead investors to demand their money back, prompting some funds to bar all such withdrawals. That could make investors think twice about keeping money in any hedge fund, as could the elevated level of market uncertainty.
The financial industry has endured many a bust following a boom, but today’s looming troubles stand out because Wall Street was doing so well and the reversal was so quick.
Wall Street firms thrived in recent years as the surging global economy fed a land rush in corporate mergers and a worldwide stock market rally. The financial industry’s profits soared 88% last year to $33.1 billion. Record-setting annual bonuses -- as high as tens of millions of dollars each for top executives at major firms -- bankrolled a luxury spending spree that helped New York’s real estate market avoid the downturn affecting much of the rest of the country.
The buoyancy on Wall Street, however, has given way to murmurings of layoffs and a creeping angst that the worst may be yet to come.
“People are definitely concerned,” said a person who works in the bond department at a major investment bank. “There are people who have gotten used to the lifestyle that comes along with the boom years, and some of those people are going to be in for a rude awakening.”
Wall Street firms, which are crucial to New York’s economy, still have many things going their way.
Although private equity deals have been slowed, traditional takeovers in which one company buys another are continuing, especially those in which the purchase price is paid in stock instead of cash.
“Things were great. Things are still decent,” said Michael Thompson, research director at Thomson Financial, a research firm in New York. “I’m not buying into the notion that there are going to be thousands of investment bankers sending out their resumes and they’re all going to lose their bonuses. These firms by and large for the year are still going to be profitable.”
The plunge in stock prices has hit investment bankers and traders especially hard because much of their compensation comes in the form of stock that the holders are often restricted from selling for a time.
Even if they lose their jobs, rich investment bankers and traders are likely to remain rich. And not all employees on Wall Street are well paid. They would be especially hurt by layoffs, rumors of which are centered in the bond units of investment banks.
“The nervousness is setting in,” said Michael Karp, chief executive of Options Group, a New York-based firm that consults on executive hiring and compensation. “We’ve a seen a lot of resumes coming in from a lot of people” concerned about their jobs.
Thus far, the travails don’t seem to have crimped Wall Street’s free-spending ways.
At the Bubble Lounge, a champagne bar in the trendy Tribeca neighborhood that caters to the Wall Street set, business has held up recently.
“I haven’t seen anyone come in crying because they lost a job or are upset,” co-owner Emmanuelle Chiche said.
A prolonged Wall Street downturn, however, would be a different story.
“That would not be fun,” Chiche said. “That would be a problem.”
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