Wall Street profits are likely to take a hit this year, as higher interest rates and mounting legal costs take their toll, a new report by New York State Comptroller Thomas DiNapoli forecasts.
The comptroller’s annual update on the securities industry (PDF) predicts that profits for New York-based securities firms will fall well below the $23.9 billion recorded last year, and may come it at only $15 billion or so. That would mean that industry profits in the second half of 2013 would be only half the $10.1 billion recorded in the first six months of the year as regulatory and litigation costs weigh on earnings.
The straw that breaks the camel’s back, DiNapoli warns, may prove to be D.C. lawmakers’ inability to smoothly manage the nation’s finances. “The political gridlock in Washington may take a bite out of the securities industry’s profits for the fourth quarter,” DiNapoli cautions. “Washington’s inability to resolve budget and fiscal issues is bad for business.”
So even as Wall Street has made what DiNapoli calls “an impressive comeback” from the financial crisis the reached its depths with the bankruptcy of Lehman Brothers five years ago, other (lower paying) industries continue to be stronger drivers of New York’s economic recovery. In contrast to previous recoveries, DiNapoli notes again this year, Wall Street is playing a lesser role when it comes to spurring job growth in New York City.
In a typical economic recovery, Wall Street plays a leading role in terms of generating more jobs and higher wages both city- and state-wide. This time around, however, Wall Street’s own recovery seems to have stalled in the summer of 2011, at least in terms of job creation. DiNapoli’s office calculates that some 163,400 New Yorkers worked for Wall Street firms as of August 2013, or about 13.5 percent fewer than worked there before the financial crisis struck.
That’s not great news for the city on two fronts. First of all, every Wall Street job tends to create two more jobs in New York City and another additional job in New York State, in other sectors, as the spending power of those investment bankers and traders trickles down. DiNapoli is diplomatic in his report, but is forced to acknowledge that during this recovery “the securities industry has not stimulated significant employment growth in other employment sectors.”
Wall Street has ceded the leadership in job creation to other private sector businesses. While the number of new jobs created in New York City is double the number of those lost during the recession, Wall Street accounted for less than 1 percent of those gains. And average salaries in those other industries offer “substantially” lower salaries or wages. Wall Street may now account for only 5.1 percent of all private sector jobs in New York City, but its employees pocket 21.9 percent of all the wages, the report notes.
Wall Street will still be contributing more to public coffers, though. Indeed, about the only groups that may have cause to celebrate this report are the city and state revenue departments. Profits may be falling, but city tax revenues soared 27 percent to $3.8 billion in the last fiscal year, which DiNapoli attributes to changes in federal tax rules. Statewide, the securities industry accounts for nearly 16 percent of all government revenue. While that’s below the peak of 20 percent recorded in recent years, DiNapoli’s office forecasts that tax collections during the current fiscal year will be significantly higher than before the crisis.
The picture that the report paints of today’s Wall Street is of an industry that is leaner, but whose denizens still end up pocketing very generous compensation packages. The average securities industry salary was an impressive $360,700 last year. While that’s below the peak of $401,500 reported in 2007, it’s still higher than recorded in any year prior to 2007 and more than five times the average private sector income in the city.
What is happening to bonuses for this year remains murky: Volatility in profits and increased regulatory scrutiny of bonus policies have put downward pressure on those payments or caused them to be restructured in ways that make it tricky for the comptroller’s office to identify how big bonus payments will be for 2013.
This report card on Wall Street’s financial health and wellbeing isn’t going to offer much comfort to anyone. On the one hand, its critics can still point to the lavish pay that bankers and traders receive. On the flip side of the equation, however, employment growth remains stalled (except for those who happen to be in risk management or compliance) and profitability appears poised to turn south – a move that could take a further toll on the local economy and ultimately on city and state tax revenues.
DiNapoli’s report is full of facts and numbers, but those details lead directly to one clear conclusion: Now that, five years after the crisis hit, Wall Street’s major institutions are once again thriving, they and the regional economy may be about to start paying the price of success. JPMorgan Chase’s massive $13 billion settlement agreement with the U.S. Justice Department and other entities is one case in point.
Given such legal costs and the related need to hire more risk management experts, refrain from some formerly profitable businesses and jump through more regulatory hurdles, banking is becoming a more costly business.