Layoffs expected to shred Wall Street ranks

“There was no reason for the industry to grow as fast as it did,” said Thomas Philippon, a finance professor at New York University who has studied the financial industry’s growth cycles. “The fundamentals just weren’t there.”

His models predict the financial sector will shrink to around 7 percent of gross domestic product, shedding US$100 billion in annual wage costs. That would be Wall Street’s first contraction in GDP terms since 1933, according to Philippon.

The pullback comes at a heavy cost. New York state Comptroller Thomas DiNapoli has said that over the next two years, the financial crisis could cost the state and New York City 225,000 private-sector jobs and the state and city US$6.5 billion in tax revenue from the securities industry.

For financial workers caught in the whirlwind, anxiety runs high.

“Everybody’s talking about it, of course,” said Oliver Bouchard, a New York-based technology specialist for Citigroup, whose stock dipped below US$4 last month, before federal regulators unveiled a plan to guarantee hundreds of billions of dollars in possible losses by Citi and inject more money into the struggling bank. “People are fearful for their jobs.”

Bouchard, speaking for himself and not his employer, doesn’t think he’ll be among those laid off but said “nobody at this moment knows what’s going on.”

“Everybody hopes that it will just resolve itself,” Bouchard said.

So where will the next round of layoffs hit the hardest?

The sectors of the industry that deal with mortgage-related asset-backed securities and other risky investments are expected to be among the most battered. The subprime fiasco has left investors wary of holding such investments. As a result, many financial firms have closed mortgage-related divisions. Experts expect that trend to accelerate next year.

“Any sector related to mortgages will contract significantly, probably by as much as half,” said Sung Won Sohn, an economics professor at California State University, Channel Islands. “Many of those people simply aren’t going to be needed.”

Another group whose ranks are being thinned are financial engineers. Those are the math whizzes, lured from top schools to build complex computer trading models at hedge funds and big Wall Street firms. The so-called “quants” have been blamed for underestimating the risks of mortgage-related securities, derivatives and other exotic assets that helped trigger the financial crisis.

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