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NEW YORK: Securities analysts are being culled in large numbers on Wall Street, and unlike in previous downturns, many of these jobs may never come back.
Already, an estimated 150,000 jobs have been lost by the financial sector worldwide, and more losses are expected, particularly in investment banking and trading. Banks and brokerage firms are not only struggling to recover from huge write-downs of mortgages and other assets but also facing a collapse in deal and financing activity.
But tens of thousands of analysts, who work in research departments that had already shrunk after the government-mandated separation of research from investment banking, are again on the chopping block.
“There's wicked consolidation occurring and, in the process, a lot of analyst jobs are getting cut and not coming back,” said Jim Bianco, president of Bianco Research in Chicago, which tracks and analyzes macroeconomic and market trends.
It all means that some major companies may not be covered by as many of the big banks, and many more medium and small companies will lose coverage altogether. That can really hurt the entrepreneurial edges of corporate America, because without the exposure, it can be more difficult for smaller companies to attract investors.
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In the past, analysts could be revenue earners for banks and brokerages, helping their investment bankers sell deals to investors.
But following reforms forced on the banks by Eliot Spitzer when he was the New York State attorney general, after a tainted research scandal during the dot-com boom and bust, they can no longer work hand in hand with the bankers as research analysts. Instead, they depend on investment banking work for their own bonuses.
And that means they are now seen largely as costs that can be cut when times get hard. The rapidly deteriorating condition of the U.S. and global economies and the impact of the financial crisis on bank income have made matters all the worse.
“These research positions won't come back in 2009 and possibly 2010,” said Lawrence McDonald, formerly vice president of distressed convertible trading at Lehman Brothers, who left the firm in March. Lehman collapsed in September.
“The sell side cannot justify the cost of fundamental research,” said Tom Sowanick, the chief investment officer at Clearbrook Financial in Princeton, New Jersey.
Sowanick said analysts had become very short-term-oriented and lent value to hedge-fund trading types but were of little use to the retail or pension industry.
In that regard, “if risk-taking is shrinking on Wall Street, then proprietary research will also have to shrink,” he added. “I think that analyst roles will be in-house roles for the buy side.”
Their case has not been helped by Wall Street research departments' poor track record in calling the past year's economic crisis and the slide in companies' earnings and stock prices.
Too often, analysts have had “buy” and “hold” recommendations on the stocks of companies that have gone out of business, including Lehman Brothers and Circuit City.
Many analysts, or formerly employed ones, appear to be aware of their challenges. However, the New York Society of Security Analysts has actually seen its membership grow, to 11,000.
“We were expecting membership to drop off and not increase. It looks like analysts are increasing their networking possibilities,” said Nanci Roth, manager of marketing and development member services of the society.
There are now about half as many Wall Street analysts as in 2000. Spitzer overhauled the profession with $1.4 billion in settlements and a new mandate for how the industry would be structured, but it made it more difficult for analysts to justify their existence.
Some brokerage firms had combined analysis with investment banking during the dot-com boom. Spitzer uncovered evidence that analysts sometimes publicly touted certain investments, while within the firm they acknowledged the stocks were of dubious value.
“Because of Spitzer, analysts had to retool themselves,” Sowanick said. “Essentially, these analysts became analysts for hedge funds because hedge funds were a source of income and they had an appetite for equity and fixed-income research.”
Now that avenue is virtually shutting down, as deleveraging, less risk-taking and lower returns have hurt hedge funds, too.
“Analyst jobs are a function of the size of Wall Street,” Bianco said, “and Wall Street is shrinking, so these jobs will be going away.”