Music Stops for Wall Street Bankers

Wall Street's latest problem: too many bankers and not enough deals.

Amid new regulation, lower profits and a dreary market for mergers and acquisitions, several banks are planning to trim investment-banking units that were built for an era of deals aplenty.

Having already slashed bonuses, banks including Citigroup Inc., C +0.77%Goldman Sachs Group Inc., GS -0.11%J.P. Morgan ChaseJPM -0.28% & Co. and Morgan StanleyMS -1.49% are preparing to cut dozens of jobs, including some held by senior bankers, according to people familiar with the matter. As they pursue this targeted round of trims as soon as next month, they and rivals are also revisiting profit expectations for their advisory businesses, people familiar with the matter said.

Until recently, Wall Street's ax had largely fallen on trading desks, which shed thousands of jobs as business dried up due to regulations and lackluster markets.

But the cost-cutting focus is now expanding to deal makers and corporate advisers that have remained among Wall Street's most high-profile professionals even as their contributions to banks' bottom line has been dwarfed by traders. In addition to mergers-and-acquisitions advisory, investment banking includes raising capital through stock and debt.

"The whole paradigm of banking is changing so there is a lot of right sizing and that will continue throughout this year," said Michael Karp, managing partner at Options Group, a financial-services industry executive search firm. All of the top firms "have overcapacity," he added.

As is often the case in Wall Street's Darwinian culture, the culling is expected to affect the old and the weak. The job losses will target underperforming bankers and those nearing retirement age, according to people familiar with the situation.

The goal is to remove people who aren't "pulling their weight," said one investment-banking head at a major bank, adding that "banks are overbuilt" in relation to the work available. As compared with years past, banks are less willing to keep those employees on board in hopes of a near-term recovery.

While bankers insist that conditions remain ripe for deal action, a stubborn slump in transactions is eating into revenue. In the first quarter of 2012, global M&A revenue fell to $3.8 billion, a more than 17% drop from the same period a year ago and the lowest quarterly revenue total since the first quarter of 2010, according to Dealogic.

In last year's first quarter, top-ranked J.P. Morgan advised on $132.6 billion worth of deals in the U.S. This year, that figure fell to $46.2 billion. Second-ranked Goldman advised on $81.6 billion worth of deals in the U.S. during last year's first quarter, but only worked on $42.8 billion worth of deals in the first quarter this year.

The declines in activity come as pay has already fallen across Wall Street, with investment-banking bonuses for 2011 shrinking by as much as 30% at banks such as Citi, Credit Suisse Group AG CSGN.VX -3.66% and Morgan Stanley. The cuts reflect a tough environment for the industry, which has faced lower profits amid increased regulation and troubles stemming from the European debt crisis.

Bonuses have been cut for bankers of all levels, including junior bankers, whose pay many senior bank executives say is outsize given the new realities and how much business they bring in. Typically, analysts and associates who are at the bottom rung of the ladder earn base pay in the low six-figures, plus performance-based bonuses, according to industry participants.

The average managing director in investment banking makes around $400,000 in base pay, and high-performing bankers used to take home several million dollars in annual bonuses. But this year, Morgan Stanley generally capped cash bonuses at $125,000, while other banks put various restrictions on compensation.

Senior bankers say they are also being pushed to squeeze more revenue from clients, describing a world where maintaining long-term relationships with clients who only periodically reward a bank with business is no longer considered enough.

"There is a lot of soul searching going on among bankers," said one senior official at a large bank. "The squeeze on profits and the slow deals environment have made banking less fun and less fulfilling. People are asking themselves, 'is this worth it?"'

Some bankers are choosing to leave, perhaps as they anticipate a push or see colleagues departing. Goldman Sachs has seen several high-profile departures in recent months, including Yoel Zaoui, a co-head of global M&A, George Mattson, a senior banker in the global industrials group, and Milton Berlinski, a top private-equity banker. Some of them retired while others are still assessing their next move, according to people familiar with the matter.

For some, boutique investment firms have become popular vehicles to relaunch their careers. Four former Morgan Stanley bankers who were managing directors started their own firm, Dean Bradley Osborne Partners LLC, in February. It wasn't difficult to convince the team to branch out, said partner Gordon Dean, who was vice chairman of investment banking at Morgan Stanley. Many bankers, he said, are feeling "frustrated and underappreciated."