Wall Street brokerage firms and investment banks are desperately struggling to raise large amounts of cash to stabilize their operations after the recent adverse events relating to the subprime meltdown and the resulting credit crunch.
Many banks are selling loans, especially leveraged buyout loans, at deep discounts. Such actions raise cash and remove these loan liabilities from the firm’s balance sheet. The banks’ holdings of LBO loans have dropped from $163 to $129 billion since the beginning of the year. Banks are breaking ranks from their lending groups and offering their portions of the LBO loans for a fraction of their face value. Goldman Sachs, for example, is selling its piece of the Chrysler $7 billion in loans for as little as 72 cents on the dollar.
In addition to selling loans, some banks are selling off business. Citigroup is reported to be selling its Australian retail brokerage unit. It is also reported that Citi will close branches in Taiwan and merge others in Singapore and Hong Kong. UBS AG, the large Swiss bank, is also reported to be considering selling business units to raise cash. To date, UBS has denied reports that it is selling its PaineWebber brokerage unit in the United States.
Finally, many firms all across Wall Street are continuing to cut jobs. Last year, Wall Street firms cut approximately 10,000 jobs because of deteriorating credit conditions, and additional cuts are coming. Citigroup is expected to cut at least 5% of employees in its securities unit. It announced plans in January to cut back 4,200 employees. A report this week said that Citi plans to fire 2,000 investment bankers and traders by the end of March. (It is not clear whether these cuts are in addition to those announced earlier). Richard Bove, an analyst at Punk Ziegel & Co., believes that Citigroup is going to lose 30,000 jobs before this is all over.
Similarly, Goldman Sachs may fire as many as 5% of its employees or 1,500 people. Goldman claims, however, that it is merely weeding out underperformers and not engaging in layoffs. Finally, UBS just announced that it may cut 5% to 10% of jobs across its different business units or up to 8,000 jobs.
Of course, none of these numbers include the Bear Stearns employees who will be let go after the merger with JP Morgan Chase is completed. If you work on Wall Street, you are in for a bumpy ride at the very least. If you run a Wall Street firm, it will not be much better. The effects of this additional turmoil on the investing public will have to play out over the next several months.