Morgan Stanley plans to slash 1,600 jobs in what may be just the beginning of a new round of layoffs at large investment banks, this time driven by a deeper reassessment of Wall Street businesses in the face of new regulations and capital standards.
Morgan Stanley, the sixth-largest U.S. bank by assets, plans to begin letting go of the employees, many of whom work in its securities unit, starting this week, two people familiar with the matter said on Wednesday.
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A third person who has been involved with plans to cut staff at Morgan Stanley and other large banks said that Morgan Stanley's cuts had been in the works for months, and that more are expected in the future.
Large global investment banks have been cutting staff for the better part of five years, when the financial crisis pegged to the U.S. housing market began to seize up markets.
Firms previously focused their job cuts on areas where activity had screeched to a halt, such as securitization of mortgages, or that were explicitly banned by new regulations, such as proprietary trading.
But banks are now making strategic decisions about businesses in grey areas where management teams do not see major profit potential, or realize that their individual banks are not competitive, the third source said.
"It's hard to look at yourself in the mirror, and say: 'I'm not good at this,'" said the source. But now that management teams are coming to those realizations, he said, they are beginning to make strategic decisions to exit businesses and cut more staff.
So far, the most prominent example of a bank making that kind of a tough decision is Swiss bank UBS AG, which said in October that it would exit bond trading altogether and eliminate 10,000 jobs.
Morgan Stanley has said it will not give up on the fixed income, currency and commodities trading business, known as "FICC" in Wall Street circles. The firm has said it wants to boost market share in FICC by two percentage points.
But Morgan Stanley is aiming to exit more complex realms of bond trading that require more capital under new regulations.
The latest staff reductions will affect 6 percent of the institutional securities unit's workforce, which includes the bank's FICC business. The cuts will target salespeople, traders and investment bankers, the sources said. Support staff who work in areas such as technology will also be affected, the sources said.
Although all staff levels will be affected, the likely targets will be more senior employees who take in the biggest paychecks, and about half of the cuts will come from the United States, one of the sources said.
The cuts are also notable because, unlike its chief rival Goldman Sachs Group Inc, which culls the bottom 5 percent of its workforce each year to improve performance, Morgan Stanley does not have such a staff reduction program.
Some analysts have questioned Morgan Stanley's plans to gain market share in the bond trading business.
JPMorgan analyst Kian Abouhossein - who earlier said that Morgan Stanley should give up that goal - expects Wall Street banks to report a 10 percent decline in revenue for the fourth quarter, compared with the previous period.
Bernstein Research analyst Brad Hintz, a former Morgan Stanley treasurer, said in a report on Wednesday that layoffs are expected in capital-intensive areas of Morgan Stanley's fixed-income trading business, such as asset-backed securitization, synthetic products, structured credit and correlation trading.
"Investors continue to wonder how Morgan Stanley's fixed income business will be able to generate steady returns and beat its cost of capital without massive changes to its business model," Hintz said.
RESTRUCTURING WALL STREET
Morgan Stanley Chief Executive James Gorman has pledged to cut costs, and said in July that he planned to reduce overall staff 7 percent in 2012. The new job cuts are in addition to that plan, the sources said, and come just a week after Colm Kelleher took over as the sole president of the securities unit on January 1.
The cuts represent less than 3 percent of Morgan Stanley's entire estimated workforce at year-end, following other staff reductions in 2012.
"This continues the steady drumbeat of negative news from banks," said Greg Cresci, a Wall Street recruiter with New York-based Odyssey Search Partners. "It's hard to tell where the bottom is, given how many banks have made similar announcements."
Altogether, U.S. financial firms announced plans to reduce payrolls by 38,135 jobs last year, in addition to 63,624 job cuts that were detailed in 2011, according to employment consulting firm Challenger, Gray & Christmas.
"We are seeing a redrawing and restructuring of the industry," said John Challenger, CEO of the firm. "The map continues to be redrawn in terms of regulation, who the competitors are, and the resources banks are willing to commit to the investment banking business."
In addition to earlier job cuts at Morgan Stanley and UBS, Goldman Sachs cut 700 jobs during the first nine months of 2012 as part of a plan to reduce annual expenses by $1.9 billion.
Citigroup Inc announced plans last month to cut 11,000 jobs, including some in investment banking and trading, to save $1.1 billion in annual expenses. Credit Suisse Group AG is also cutting securities jobs to reach an annual cost-savings target of 1 billion Swiss francs ($1.1 billion), while Bank of America Corp is in the process of cutting 30,000 jobs across the firm in a plan unveiled in 2011 to save $5 billion in annual expenses.
Morgan Stanley shares fell 0.2 percent to close at $19.62 on Wednesday. Its shares are up 15 percent over the past 52 weeks, part of a broad rally in financial stocks.
($1 = 0.9271 Swiss francs)
(Editing by John Wallace, Theodore d'Afflisio, Dan Grebler, Gunna Dickson and Edmund Klamann)