December 5, 2023

Investment Banking

Let Your Investment Banking Do The Walking

Goldman Sachs Plans To Downsize 4,000 White Collar Workers

Wall Street has caught the contagion that caused large layoffs in the tech sector. Top-tier New York City-based investment bank Goldman Sachs is planning to let go of around 4,000 white-collar professionals. The reductions will impact around 8% of the bank’s worldwide workforce. Goldman had laid off 500 employees in September as the economy started to falter.

Similar to the way tech companies purportedly conduct performance improvement plans and stack rankings to cull out low performers, securities industry firms usually ease out a small percentage of low impact workers, or neglect to offer a bonus—which represents a significant portion of the total compensation—as a nudge for them to seek employment elsewhere.

The announcement is on the heels of prior Forbes reporting that Wall Street investment bankers, brokers, traders, deal makers and money managers are not immune to market forces, and JPMorgan, Bank of America, Citigroup and other financial institutions are considering cutting bonuses by up to 30%, and in some instances, incentive pay may fall by more than 45%. There is a fear that some low performers will get “donuts,” the cold term for not receiving any bonus payout.

It’s Not Just Goldman Laying Off People

  • Morgan Stanley, a competitor of Goldman, let go of around 1,600 people. The downsizing were, in part, a response to Morgan’s purchase of online discount brokerage E*Trade and mutual fund manager Eaton Vance which brought in around 20,000 new headcount.
  • Credit Suisse, the scandal-plagued large Swiss-based bank, announced that it would ax around 5,000 jobs. Once the smoke settles, the bank anticipates a reduction in the number of white-collar professionals from 52,000 global employees to about 43,000, including allowing for attrition without refilling open roles. Credit Suisse also has plans to cleave off its investment bank into a stand-alone capital markets and investment advisory firm, CS First Boston, revitalizing the former storied First Boston brand.
  • Due to challenges in the real estate market created by the Fed’s program to hike interest rates pushing potential home buyers out of the market, Wells Fargo laid off hundreds of people in its mortgage division.
  • UK-based Investment bank Barclay’s, with a strong presence in the U.S., is exiting about 200 employees in its banking and trading units, and Citigroup laid off about 50 traders.
  • Germany’s largest bank, Deutsche Bank, plans on separating dozens of staff from its payroll. The move will impact the investment bank’s origination and advisory teams, affecting mostly junior bankers.

Why Are Layoffs Happening?

Just as the tech sector spent lavishly on its workers and hired aggressively, so did major financial institutions. Similar to the tech sector, Wall street careened from boom to gloom. During the pandemic through 2021 both Wall Street and the tech sector thrived. With access to cheap funding, they were able to aggressively hire and grow their respective businesses.

Once the Federal Reserve Bank initiated interest rate hikes to combat record levels of runaway inflation, the business landscape substantially changed. In the absence of low-cost borrowing and higher operating costs, Wall Street, along with the tech sector, needed to adjust. This included cutting costs and headcount.

When CEO David Solomon took over after Lloyd Blankfein stepped down in 2018, the bank’s professional class boomed by about 34%. There was a spike in hiring as the more than 150-years old institution dived into fintech and needed to bring aboard software engineers and others to both build out their nascent consumer division and integrate bolt-on acquisitions. Other well respected banks such as JPMorgan and Citigroup ratchet up hiring by 13% and 17% respectively.

Young Bankers, Like Tech Worker, Were Lavished With Top Pay And Perks

A group of young Goldman Sachs bankers alleged they were forced to work 100-hour workweeks. The junior bankers accused Goldman of making their lives miserable and not allowing them any semblance of work-life balance.

Bankers at other firms complained too. In response, management of the investment banks offered their junior bankers Peloton bikes, retention bonuses, salary increases and the promise to hire additional personnel to deal with the workload.

They needed to cater to their workers as Wall Street boomed with IPOs, SPACS, investment banking activities, M&A and sales and trading from mid-2020 to 2021. Due to the incredible increase in business, Wall Street laid out some of the most significant bonus increases, according to Johnson Associates.

Top-tier investment banks, including Goldman Sachs, JPMorgan, Citigroup, Morgan Stanley and Bank of America, paid out around $142 billion to their workers in 2021. This amount didn’t include the many other financial services firms.

The Swift Change Of Fortunes: Investment Banking, Deal Making And M&A Activities Plunged

The fate of well-heeled bankers may follow the same trajectory as the tech sector. Startups and big tech hired aggressively due to pent-up demand and cheap financing available created by artificially depressed interest rates.

As the market turned against them, over 140,000 tech workers lost their jobs, hiring freezes were put in place and job offers were withdrawn. Bankers may suffer a similar fate unless the economy picks up. It looks like management recognizes that there are too many highly compensated people for too few investment activities.

The largest five United States investment banks saw their revenue plunge by nearly 50%, representing around $19 billion during the last three quarters of 2022. The decline in mergers and acquisitions, deal-making activities and initial public offerings caused management to reconsider paying big bonuses.

The confluence of the Federal Reserve Bank raising interest rates, runaway inflation and general uncertainty over macro and geopolitical events contributed to a slowdown in IPOs and other deal-making activities. Over the summer, the New York Post predicted, “Layoffs will ravage the industry’s workforce by at least 10%—and that the bloodbath could be in full swing by year’s end.”

This hurts the wallets of white-collar Wall Street professionals who earn a large portion of total compensation in their yearly bonus. For high performers, in a good year, they can take home six to seven-figure bonus payments.

The Contagion Effect

There is a herd mentality amongst corporate leadership. If a business leader such as Goldman conducts layoffs, others will follow. There will be concern by boards of directors that if everyone else is downsizing, why isn’t their company? Major shareholders will contend that management is not judicious in making tough decisions.

By reducing headcount, shareholders and the board will benefit, in the long term, by saving money to help navigate a predicted upcoming recession. Once a few firms within a sector lay off workers, it offers cover for other companies to follow suit. It makes it easier for the CEO and C-suite to conduct layoffs if everyone else is doing it too. They can prune the low performers without worrying about being accused of discrimination or biases.

With the stock market falling recently in response to tough talk by Fed Chair Jerome Powell, it is reasonable to conclude that there will be continuing layoffs on Wall Street, and other sectors too.