[Marxism] Wall Street bloodbath

Louis Proyect lnp3 at panix.com
Mon Jun 16 07:22:16 MDT 2008


The Bottom Line
Last One Left, Please Turn Out the Lights
Wall Street is in the midst of its biggest, ugliest, worst round of 
layoffs in decades.

     * By James J. Cramer
     * Published Jun 15, 2008

In 25 years on Wall Street, I have never seen things this bad. We’ve had 
some tough times: the 1987 stock-market crash, the collapse of the 
once-all-powerful Drexel Burnham Lambert, the immolation of Long Term 
Capital, the post-9/11 calamity, and the dot-com implosion. Every one of 
these events rocked the Street, causing pay cuts and layoffs and 
creating a sense of doom. But this time is different; it’s doom itself.

Wall Street closely guards its layoff numbers, but piece together the 
evidence and a grim picture appears: an estimated worldwide total of 
4,000 dismissals at Morgan Stanley, 5,000 at Merrill Lynch, 7,000 at 
UBS, and 16,000 at Citigroup. Even the extremely profitable Goldman 
Sachs is letting people go in some departments. Then there’s Bear 
Stearns. A year ago, Bear was the firm to work at. People talked of the 
Era of Bear. Now it’s gone. Vanished. With more than 10,000 of its 
14,000 former employees either looking for work or soon to be laid off 
by its new owner, JPMorgan. Right, JPMorgan—the firm that seemed to 
pants the Fed and Treasury when it snapped up Bear Stearns for a 
pittance. Well, it now appears possible that Morgan may have grossly 
underestimated how terrible the Bear bond portfolio may be. The thinking 
on the Street was that Morgan couldn’t miss; it got $30 billion in 
guarantees against losses. But now it looks like the losses might exceed 
the guarantees. For those of us looking to Morgan as the 
best-capitalized play on Wall Street after Goldman, one that could 
emerge as a strong player when things get better, the possibility that 
the Fed got the better end of the deal is chilling. As if all that 
weren’t bad enough, news came last week that Lehman Brothers is fighting 
for its corporate life. As someone who has great respect for Lehman CEO 
Dick Fuld, I’m stunned at the size of the reported $2.8 billion loss for 
the quarter just finished, especially considering how confident the 
company was about its prospects for that quarter a couple of months ago. 
They just raised $6 billion in capital at what I thought were fire-sale 
prices, but immediately the stock went below the $28 offering price, 
even though that figure already represented a hefty discount versus the 
previous week’s price. The people who bought into this deal have to feel 
like they just leased an apartment in Dresden after the first 400 
bombers hit, not realizing that there were another 900 behind them. 
Lehman’s compensation costs are so out of control that it’s going to 
need to break out the electric bleachers to downsize ahead of the 
short-selling posse. It already reassigned CFO Erin Callan and COO 
Joseph Gregory. The 28,100 overpaid, underworked employees who remain in 
place are simply ballast on Lehman’s leaky ship.

In typical times, the castoffs from these sinking (or sunk) firms would 
have no problem finding jobs. When Drexel collapsed, or Deutsche Bank 
picked off Bankers Trust, or Prudential eliminated its equities 
business, there was always some shop on the rise, looking to hire. But 
these are not typical times. This time around, no firm—no area of the 
business—is rising. Every product, from stocks and bonds to mergers and 
acquisitions to corporate finance, is under pressure at every bank. The 
clients themselves, fresh from getting talked into buying horrid complex 
products, many of them mortgage-related, are not exactly eager to buy 
anything exotic, which is where the big fees have been coming from in 
recent years. Worse, the same clients sold lots of those exotic products 
back to the firms that issued them, and I don’t believe all the 
write-downs on that acid-reflux inventory have been taken yet, 
particularly at Lehman, Merrill, and Citigroup. I expect tens of 
billions more in write-downs from those three firms alone.

At the same time, a host of other profit sources are drying up. 
Private-equity deals have shut down almost completely, as the slowdown 
in the economy has stoked fears that the newly privatized, debt-laden 
companies won’t be able to make good on their bonds. The banks are no 
longer generating profits from lending hedge funds billions to buy 
product, because the brokers ended up taking a beating when the clients 
borrowed too much and then began to default on those loans. The bankers 
and brokers had moved aggressively into these fixed-income revenue 
rivers in the first place because the equities-trading game, long a 
mainstay of all of these firms, had become so commoditized that it was 
impossible to make money from it. To make matters worse, former attorney 
general Eliot Spitzer destroyed a once-sweet fee-generating scam—the 
practice in which banks’ research departments wrote rosy reports about 
companies in order to win their investment-banking business and rake in 
the M&A profits. No wonder all of these stocks are at or near their 
multiyear lows, depths not seen since the dot-com aftermath of 2002, 
when Wall Street last shriveled.

Not all is grim. Morgan Stanley, for one, is making a concerted effort 
to build an asset-management business, where it takes clients’ monies 
and manages them in-house. That’s nowhere near as lucrative as selling 
proprietary mortgage bonds, or other exotic products, but asset 
management tends to have a longer half-life because individual money is 
“sticky,” not “hot”—it stays in one place.

Then there is Goldman Sachs. Goldman, from the days that I worked there 
in the eighties, always had a phrase, “long-term greedy,” that it used 
to discourage those brokers who wanted to make a trade that made a quick 
buck for the salespeople but wasn’t in the best interest of the client. 
“Give them the dollars, you take the pennies, and they will be with you 
for life,” my old boss used to say. That approach is why the firm never 
fell into the Bear trap, and why it’s been able to buy back 11 percent 
of its equity in the past four years, rather than issue billions of 
dollars in value-diluting stock.

I am an inherent optimist about Wall Street. Every time I’ve seen one 
business go down, there was always a replacement business right behind 
it. The Street was always like a four-engine plane: It could handle one, 
even two engines going down, and keep flying. Now, though, it feels like 
all the engines—investment banking, bonds, equities, and mergers and 
acquisitions—have shut down at once. Try as I might to see where new 
business can come from, I don’t see it coming anytime soon. That’s bad 
news for the banks and their shareholders. It’s bad news for the 200,000 
or so people who work on the Street and the estimated 850,000 who buy 
and sell securities nationwide. And it’s bad news for the New York co-op 
owners, real-estate brokers, and others who benefit from Wall Street 

God knows why, but people often call me to see if I can help place them 
or their brother or daughter or nephew at a Wall Street firm. There was 
a time when I would happily say yes; sometimes my help even worked. Not 
anymore. These days, I don’t even bother. The era of the big Wall Street 
payday is over. When people call me looking for a job, I tell them to 
try a law firm.

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