Headline: Wall Street May Be Spoiler for New York's Economy

Source: New York Times, 14 August 2001

URL: http://www.nytimes.com/2001/08/14/nyregion/14ECON.html

To most of the men who would be New York City's next mayor — and to the current denizens of many municipal offices — the economic outlook still seems relatively rosy.

Sure, the national economy is suffering, they acknowledge. Sure, the city's boom may slow a bit. But in interviews and on the stump, the candidates tend to echo professional budgeteers whose fiscal forecast is still "fair to partly cloudy."

Two subway stops south of City Hall, however, the economic outlook is distinctly dire. Wall Street is suffering through its worst patch in a decade. Profits are plunging, jobs are vanishing and bonuses are shriveling (for those who stay employed). Analysts who track the securities business stop short of predicting that plagues of locusts will ravage Lower Manhattan — but only just.

Given how important Wall Street is to the city's economy — not to mention its tax revenues — both forecasts cannot be right. The state comptroller's office estimates that though the securities firms provide less than 5 percent of the jobs in the city, they pay almost 20 percent of the wages.

Thousands of people who work on Wall Street — perhaps as many as 30,000 — are facing pink slips, and that doesn't include all the barbers, bartenders and bauble-sellers who depend, indirectly, on Wall Street. Its trade group, the Securities Industry Association, says that each job supports two in other fields, like law, consulting or printing.

That group also predicts that bonus payments will fall steeply this year, by 30 percent or 40 percent. That works out to a drop of roughly $4 billion from last year — the loss of which would ripple through expensive stores and pricey co-ops to City Hall, which would collect a lot less of the income and sales taxes that have kept its coffers full.

No wonder people who know Wall Street are gloomy — and not just Michael R. Bloomberg, who once worked on Wall Street and is far more downbeat than his rival mayoral candidates, Republican and Democrat.

Listen to Felix G. Rohatyn, who has been an investment banker, an architect of the bailout that saved the city during the fiscal crisis of the 1970's and, more recently, ambassador to France. The situation on Wall Street "is brutal, and it's going to be very brutal," he said recently. "The city inevitably has to feel it, and the next mayor is going to have to deal with it."

And all the newcomers in City Hall and on the Council are going to have to move fast, he added. The downturn "won't leave a lot of time for practice."

If few of the city's many candidates acknowledge that dreary future, they have some good reasons. One is simply strategic: gloom seldom plays well on the campaign trail. (Nobody wants to vote for Eeyore.) And there are structural reasons that politicos and financiers seem to live in different economic galaxies. Few investment bankers understand the intricacies of the city budget; few bureaucrats understand the profound changes that are racking Wall Street.

But the combination of incomprehensions worries some watchdogs, who fear that city officials and workers will still be celebrating the boom times long after they've gone bust. "I'm concerned that these years of surpluses have lulled everyone into a sense of complacency," said Marcia Van Wagner, an economist for the Citizens Budget Commission, a civic monitor.

To be sure, nobody is predicting a return to the "Drop Dead" days of the fiscal crisis in the 1970's, or even to the dog days of the early 1990's, when the city lost hundreds of thousands of jobs. For one thing, the recent boom on Wall Street was accompanied by a burst of economic activity outside of Manhattan, which did not happen in the late 1980's. Real estate developers have not been putting up skyscrapers first and looking for tenants later, as they did 15 years ago.

And compared to earlier decades, the city now has a far better grip on its finances — and plenty of watchdogs looking over its shoulder. "I'd say New York has about the strongest longterm financial planning process" of any major city, said Robin Prunty, an analyst at Standard & Poor's.

One secret of the city's fiscal success in recent years has been to systematically underestimate the amount of money likely to flow into its coffers, as Mayor Rudolph W. Giuliani conceded last month at a meeting of the State Financial Control Board. "Never predict a good year, but always predict a bad year," he said, and you end up with a surplus. "We're not leaving a problem for the next administration." But one drawback of the mayor's "cry wolf" strategy is that if a wolf actually shows up, many do not believe it.

That could well be a problem in New York City — and has already helped cause budget impasses in states including Michigan, Wisconsin, Tennessee and North Carolina, said Robert Kurtter, a senior vice president of Moody's Investors Service Inc., another bond rating agency. Legislators in those states had gotten used to discounting low revenue estimates during a decade-long economic expansion, and are finding it hard to accept that this year there won't be extra money, he said.

In New York City, the budget is in balance for this fiscal year, which ends in June, mostly because of a huge surplus left over from the boom times. But the out-years, as they are known in budget lingo, show rivers of red ink: $3.3 billion for the next fiscal year, growing to $4.9 billion in the 2005 fiscal year, according to the city's Independent Budget Office.

It is hard to get worked up about future budget gaps, because they have been forecast for years, and never materialized. Wall Street profits have ridden to the rescue, according to H. Carl McCall, the state comptroller. If that extra cash does not materialize, he warned recently, the city will have to cut at least $1.7 billion — 25,000 jobs — and try to get vast amounts of money from the state and federal governments, which may themselves be strapped.

True to his strategy, the mayor predicted that 2001 would be a very bad year for Wall Street. The Office of Management and Budget assumed that securities firms would have profits of just $5.5 billion, down from a record-breaking $21 billion in 2000.

Since these firms have made more than $7 billion just in the first half of the year, according to the Securities Industry Association, some budget officials have argued that there is nothing to worry about, at least in this fiscal year.

The mayor's budget assumes that the firms will make $10.2 billion next year, which is more than they made in 1998 (a bad year for the bond business) but far less than they made in 1999 or 2000.

Returning to the profit levels of three years ago may not sound so bad — but for Wall Street, it would be. (And not everyone thinks the firms will make even that much money.) The problem is that the firms pumped up their businesses in the late 1990's, when it seemed as if every amateur wanted to play the market, every tiny company wanted to sell stock to the public, and every big company wanted to buy another big company — or two or three.

The securities firms added thousands of analysts, investment bankers, brokers and traders. They paid them billions of dollars in bonuses. They spent money on new buildings, computer systems, advertising and limousines. And now they find that they don't need all those people — and may never need them again.

Even if the market recovers, no one is expecting the business to return to the level of a year ago. "The shakeout will be completed by the middle of next year, but the growth rate will be only half of what it was," said William C. Freund, director of Center for the Study of Securities Markets at Pace University.

That's because there have been some fundamental shifts in Wall Street's business, analysts and executives say. Amateur investors have been so burned by the bear market that it may take a generation for them to regain interest in stocks. Companies are less interested in doing deals or selling shares, and those that are have increased their demands on the brokerage firms (asking, for example, for big loans from their investment bankers). The one business that has been doing well recently, selling bonds, may be running out of steam.

And trading stocks, which used to bring in the bucks even when share prices fell, has become far less profitable now. That's because regulators forced the brokerage firms to trade shares in pennies, rather than eighths or sixteenths; it may sound like a technical change, but it has taken a big bite out of profits.

So Wall Street has a lot of cutting to do. While the firms have announced more than 20,000 layoffs worldwide, it took a long time for them to start jettisoning people in earnest. So far, securities employment in the city has fallen by only about 5,000, to 185,000, since its peak a year ago.

But firms have been quietly cutting more jobs this summer, and more layoffs are on the way.

For those who remain, lower bonuses are in store, though the amounts won't be set until the fall. But if they fall by half this year, to $6 billion from $12 billion, "that's sufficient to knock a full percentage point off the growth rate of personal income for the whole state," said Rae D. Rosen, a senior economist at the Federal Reserve Bank of New York.

Like other industries, Wall Street does tend to sing the blues when it wants something from the city (usually tax breaks). In December, the New York Stock Exchange signed a deal with the city and state to build a new trading complex in lower Manhattan — in return for than $600 million in subsidies.

Richard A. Grasso, the exchange's chairman, said he was not concerned that the new mayor would be less supportive of Wall Street than the current one. "One thing they have all said is that without the New York Stock Exchange, the securities industry, this economy is in trouble," he said.

This may explain why the Street has not seemed to rally behind any one candidate.

But Mr. Rohatyn said there was another reason why Wall Street was not worried about the mayoral election. "I think the financial world is worried about what will happen to itself," he said. "And it should be."

-- Andre Weltman (aweltman@state.pa.us), August 14, 2001