The Day After

by Derek Loosvelt | March 18, 2008

In the wake of JPMorgan's announced acquisition of Bear Stearns, analysts and insiders were quick to estimate the resulting carnage, with most believing that approximately 50 percent of Bear's 14,000 employees worldwide will soon be shown the door. About half of the firm's New York employees are expected to lose their jobs, while about a third in London will soon become redundant.

It comes as no surprise that most of the pink slips are expected to come in the firm's fixed income division, specifically its mortgage, credit derivative and structured finance units. Analysts also believe that, due to overlap with JPMorgan's operations, a significant number of cuts will occur in Bear's corporate finance, M&A and equity underwriting units.

One of the few Bear units apparently safe from layoffs is its prime brokerage division, which provides loans and processes trades for hedge funds. The unit, the third largest on the Street behind Goldman Sachs and Morgan Stanley, generated $1.2 billion in revenue last year. JPMorgan, Bear's new parent, doesn't have significant prime brokerage operations, which is currently a very desirable business to be in. For the most part, prime brokerage is immune to economic downturns in that it generates revenue mainly from trading fees, so as long as companies are trading, revenue streams continue to flow.

This morning, Bear insiders were also closely listening to news coming out of other banks. Lehman Brothers and Goldman Sachs both announced first quarter 2008 earnings today (the firms operate on a November fiscal-year end), and although both reported significant slides in earnings versus the same period a year ago, their earnings surpassed analysts' expectations. The good news (or, the not so bad bad news) sent Lehman's and Goldman's as well as other financial firms' share prices soaring. In a few short hours, Lehman gained back nearly all of the market value it lost yesterday, and by the end of the day, its stock had climbed 38 percent, its highest one-day rise ever. Goldman's stock, meanwhile, wasn't far behind, as it gained 13 percent, rising more in one day of trading than it had in seven years.

Lehman and Goldman's good days helped carry the major indices skyward, as the Dow gained 2.6 percent and the S&P 500 gained 3.3 percent (financial firm's shares in the S&P increased 8.5 percent, the highest rise among the index's 10 industries).

Of course, all this sounds good for investors, but it's also good news for job seekers—and job holders.

Some see the better than expected earnings and subsequent rise in share price of two top banks on the Street as an indicator that the effects of the credit crunch are subsiding, and banks might be back on track. It's also certainly good news for Lehman and Goldman insiders who'd like to hold on to their jobs. And with rumors swirling around Bear's corridors yesterday that Lehman might be the next firm to crumble due to a shortage of cash, it's not so bad for Bear insiders, either. Those at Bear who might soon be out of a job are certainly glad they don't have to compete with thousands of former Lehman bankers for the ever shrinking number of available banking positions.

However, all this could also simply be another calm before another storm.  After all, industry insiders and analysts are still predicting that several thousand more layoffs will hit the Street before the end of year.

Filed Under: Finance


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