Capitalizing on the Crash : While Wave of Layoffs Hits N.Y., L.A. Brokerages Appear to Have Weathered the Storm--For Now
To many of the New York employees of Kidder, Peabody & Co., the Great Crash of 1987 really was a crash. In a broad cost-cutting effort, the firm announced in December that it would cut about 1,000 jobs, 15% of its work force.
But in Kidder’s Los Angeles office, the crash so far seems to be more like a little bump, if that. The firm has cut only about 1% or 2% of its staff here and is considering opening a new sales office in Woodland Hills that would offset those cuts.
“We’re not cutting back in L.A. Instead, we’re going to consolidate and go forward,” said Barclay Perry, manager of the firm’s Los Angeles office, saying that about 95% of the job cuts involved Kidder employees in New York.
Kidder’s example typifies how the Oct. 19 stock crash, which hit like a tidal wave in New York, so far has eased to a ripple 2,500 miles away in Southern California. While the securities industry in New York reels under massive layoffs and other cost-cutting moves, firms in the Los Angeles area are generally holding their own, with many keeping layoffs to a minimum, generally letting go only a handful of poor-performing brokers or investment bankers.
In some cases, firms are even expanding.
The Los Angeles office of Bear, Stearns & Co. is doubling its staff of investment bankers, placing ads in The Times touting its job openings. Drexel Burnham Lambert’s corporate finance operation here plans to add 10 to its staff of 75. Dean Witter Reynolds is adding 100 to 120 brokers in Southern California during the next year, part of a plan to add 1,000 brokers nationwide.
Banks are also moving in, with Citicorp recently establishing a mergers and acquisitions department in Los Angeles.
The intense competition is producing hiring wars for top-producing retail brokers and investment bankers. Many brokers at E. F. Hutton, for example, were hired away by such firms as Dean Witter and Prudential-Bache before Hutton merged with Shearson Lehman Bros. (now Shearson Lehman Hutton).
Meanwhile, East Coast investment bankers are sending resumes to operations on the West Coast.
“Nine months ago, you couldn’t get anybody from the East Coast who wanted to talk to you. Now they are calling regularly and sending resumes unsolicited,” said Randall Hill, head of financial services placement in the Los Angeles office of Spencer Stuart, an executive search firm.
“We’ve talked to more brokers in the last 30 days than in all of last year,” said Richard B. Kronman, a partner at Zander Associates, a Los Angeles firm specializing in job placement of brokers.
Some industry observers worry, however, that Southern California may soon take its turn to suffer from the securities shakeout. Also, intense competition here, some analysts say, is squeezing profit margins at a time when profits already are under pressure from sluggish post-crash trading volume.
“There is a more competitive market in L.A. than in anyplace else in the country,” said Perrin Long, brokerage industry analyst for Lipper Analytical Securities in New York.
To be sure, Southern California is not alone among regions outside New York City that so far have escaped the worst of the pain from the crash. The reasons are simple.
First, most of the crash-related layoffs have occurred in jobs involving investment banking, corporate finance and back office order-processing functions--jobs that are based predominantly in New York City.
By contrast, firms’ Southern California operations are more focused on trading and retail brokerage, segments that so far have suffered less than investment banking and corporate finance, which have been hurt by a decline in new stock issues, mergers and other corporate activity. Also, the securities industry is far more important in New York City’s economy than it is in Southern California or virtually anywhere else in the country.
“When something of a shock nature hits in New York City, it’s felt much more deeply there than here,” said Robert J. Juneman, director of Dean Witter’s Southern California regional operations.
Second, Southern California is still seen as a young, fast-growing and lucrative market for both retail brokerage and investment banking--an image strengthened by Los Angeles’ role as the U.S. gateway to the burgeoning Pacific Rim and as a growing base for Asian banks and other financial firms.
For retail brokerages, the lure of Southern California derives in part from its higher-than-average incomes and the new fortunes being made in such industries as real estate, aerospace and manufacturing, Kidder’s Perry says. These new fortunes are ripe for solicitation by brokerages.
“A lot of people out here don’t even have brokers yet,” Perry said.
For corporate finance and investment banking, the lure of Southern California is its fast-growing entrepreneurial business sector, which until recently the big New York-based firms tried to serve out of the Big Apple or San Francisco.
Some firms, in fact, see the current industry slump as an excellent time to expand operations here in anticipation of the next boom.
“Now’s the time to hire, when good people are available,” said Michael Tennenbaum, head of mergers and acquisitions at the Los Angeles office of Bear Stearns, which is doubling its investment banking force in Los Angeles to 20 professionals. “You can’t hire good people in boom times.”
But intense competition and expansion could erode profit margins in the short run.
Analyst Long contends that the retail brokerage operations in Southern California already have lower profit margins than the national average, in part because expenses per broker here are among the highest in the country. Rent and equipment to support the brokers here is higher, Long notes. Also, payouts--the percentage of a commission retained by the broker--are higher.
