Roaring '80s Turn Grinding '90s

By John Greenwald

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 Milken, 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."

With reporting by Thomas McCarroll/New York and William McWhirter/Chicago