TIME: Almanac 1990/1990 Time Magazine Compact Almanac, The (1991)(Time).iso/time/050189/05018900.012

Text File | 1990-09-17 | 6KB | 103 lines

BUSINESS, Page 58

Roaring '80s Turn Grinding '90s

Despite the rising Dow, Wall Street's free ride is over


    Poor Wall Street. In a slide that began with the stock-market
crash 18 months ago, the get-rich-quick go-go years have faded into
memory. No longer do brokerages open branches in every mall or
freely lavish six-figure salaries on young talent. Gone are many
of the yachts and the black-tie dinners -- along with more than 8%
of the 260,000 employees who worked in the U.S. securities industry
before the collapse. And despite the cost cutting, a fresh wave of
gloom rolled through investment houses last week. Even as the Dow
Jones industrial average surged 72.40 points to a post-crash high
of 2409.46, blue-chip firms announced setbacks that ranged from
layoffs to plunging profits. Says Perrin Long, who follows the
securities industry for Lipper Analytical Services in Manhattan:
"A new reality has set in."

    In contrast with 1988, when the binge in corporate buyouts
helped offset the defection of millions of small investors, the
latest downturn reflected weakness in virtually every phase of Wall
Street's business. With merger mania dampened by high interest
rates and fears of a political backlash against debt-laden
megadeals, the value of announced corporate acquisitions fell to
$76 billion in the first quarter of 1989, down 58% from the
comparable period last year. At the same time, intense competition
has driven down the commission on stock trades to as little as 4
cents a share, vs. about 8 cents before the crash.

    Such problems have plunged most firms into the financial
doldrums. Merrill Lynch, the largest U.S. brokerage, reported last
week that its first-quarter profits tumbled to $37.2 million, down
46% from a year ago. Paine Webber Group said its earnings dropped
56%, while Dean Witter's income was off nearly 40%. Shearson Lehman
Hutton suffered a particularly harsh blow. After writing down its
holdings in MCorp, a troubled Texas banking firm, Shearson reported
a $15 million loss for the quarter. Overall, the before-tax income
of U.S. securities firms slumped to $450 million, down 60% from the
first quarter of 1988.

    The depressed earnings were just one sign of Wall Street's
myriad woes. Drexel Burnham Lambert, the junk-bond pioneer, said
last week it plans to sell its retail brokerage business, which
trades for small investors, and concentrate on large institutional
clients. That move and cutbacks in other divisions will slash
Drexel's payroll of 9,000 employees by about one-third. In a candid
statement, Drexel said "adverse publicity" about its legal problems
had helped drive it from the retail market. Earlier this month the
company settled a Securities and Exchange Commission suit by
agreeing to fire its indicted junk-bond czar, Michael Miliken, and
submit to intense Government supervision.

    The latest moves angered many employees who had stood by Drexel
during its two-year legal ordeal, in which the firm was
investigated for stock fraud and other allegations. Outraged
brokers shouted down Drexel chief executive Frederick Joseph when
he fielded questions about the sale over the firm's coast-to-coast
intercom. "You show a lot of loyalty," a disgruntled employee said
later, "and what you get back is `Don't let the door hit you on the
way out.'"

    While Drexel's case is extraordinary, other investment houses
are going through wrenching changes in their corporate culture as
executives search for ways to cut the fat. In Chicago brokerages
are passing up the chance to rent $55,000-per-season "skyboxes" in
Wrigley Field, even though treating clients to a Cubs game is a
traditional way of bringing in new business. Many superstar brokers
now make their own telephone pitches to court new clients, and brew
their own coffee, after losing the assistants who handled those
chores. Even senior partners are being laid off when their sales
volume dwindles. "Loyalty and all that kind of stuff go out the
window," says an executive of a major Chicago firm that is trimming
10% of its staff. "We're looking at whether we want to carry their
health- and life-insurance costs. And when several brokers go,
that's one less secretary too."

    The cost cutting seems destined to continue in a world so
interconnected that a decision made in Bonn can lower prices on
Wall Street. The West German central bank inadvertently slowed last
week's stock-market rally, for example, by raising interest rates
to keep German inflation in check. The move briefly touched off
fresh fears of a worldwide round of rate hikes and slower growth.
Meanwhile, competition from Japanese and European firms that have
opened U.S. offices is helping depress Wall Street commissions.
Wall Street is not alone in its distress, for such financial
centers as London and Tokyo are experiencing similar overcrowding.

    Some Wall Street experts predict painful new layoffs at many
U.S. firms. "What the industry needs is a good housecleaning," says
Lipper Analytical's Long, who argues that brokerages would need to
dismiss 12,000 to 17,000 more employees to keep profits from
sinking further. Other analysts expect a steady decline in the
number of investment firms. Since the crash, membership on the New
York Stock Exchange has fallen from 392 companies to 365, a decline
of nearly 7%. The dropouts have either closed their doors or merged
with stronger firms.

    Partly for such reasons, a grim mood seemed evident among
brokers last week. "If you can survive this period in the
business," a Chicago moneyman said, "you can survive just about
anything." But some managers saw no end to hard times. Mused
Desmond Heathwood, chief investment officer of the Los Angeles
branch of Boston Co., a unit of Shearson Lehman: "To have one's job
will be the bonus this year."