The brokerage business proved how vulnerable it is in 1994. Despite strong growth elsewhere in the economy, America's investment firms suffered steep trading losses, thousands of layoffs, a fresh crop of scandals and the demise of the once-venerable Kidder Peabody brokerage.
Even the end of 1994 is small consolation to shell-shocked traders and brokers: Bonuses are expected to fall a third to a half compared with 1993.Sharp reversals of fortune aren't new to securities firms, which are more subject than other industries to financial market vagaries. So when the Federal Reserve began raising interest rates in February, the resulting downturn in bond markets led to huge trading losses and sharply lower underwriting fees and other sources of brokerage income.
After three years of booming growth, industry income is expected to drop by nearly three-quarters in 1994 to between $1.3 billion and $1.4 billion from $5.6 billion in 1993, said Perrin Long, an independent securities industry analyst.
That is nearly as sharp as the industry's 80 percent plunge in profits in 1987 brought on by the stock market crash that October. The 1994 downturn in bonds was a bit easier to swallow because it was spread out over 11 months.
"The longer term outlook for the industry is extremely favorable. But being a cyclical business, you're going to have periods when things aren't all that great," Long said.
"Based on what I see at the moment, I wouldn't look for any significant improvement in profit-abil-ity for the industry" in 1995, he said.
Americans outside of Wall Street may not feel compassion for a business that routinely deals seven-figure bonuses and just as regularly jettisons under-performers.
But the culprit behind Wall Street's decline - higher interest rates - could also undermine the larger economy's growth.
Indeed, the Federal Reserve's goal in higher rates is to combat inflation, by raising the cost of borrowed money and thus slowing the economic expansion that can cause higher prices.
It may be already achieving that. The Commerce Department on Thursday forecast an economic slowdown next year, although it suggested the economy will avoid a recession.
To ease losses, Wall Street firms shed about 4,000 jobs, or 4 percent of total staff this year, Long said. Hit hardest were bond-trading and investment banking units where profits tumbled.
That total includes the estimated half of Kidder, Peabody & Co.'s 5,000-staff dismissed in the firm's sale to PaineWebber Group Inc.
The 129-year-old Kidder was dismantled as PaineWebber bought choice assets in a $670 million deal with Kidder parent General Electric Co.
Kidder's dismemberment was at least partly caused by a scandal that tainted the firm's reputation. Eight months ago, Kidder publicly blamed star trader Joseph Jett for a major bond scam and fired him. Jett allegedly manufactured $350 million in phony profits to mask trading losses.
The scandal - together with hundreds of millions in Kidder losses this year from sharply lower results in the firm's mortgage bond portfolio - exhausted the patience of GE, which had plowed $1.4 billion into Kidder since acquiring the brokerage in 1986.
Sharing the scandal headlines, Prudential Securities Inc. in October admitted criminal fraud in the sale of risky limited partnerships to investors and agreed to deposit an additional $330 million into a fund to reimburse victimized investors.
Despite scandal, layoffs, and lower profits and bonuses, not everyone on Wall Street is hurting. Salomon Brothers Inc., among the hardest hit investment firms by this year's bond market plunge, lost $242 million in the first nine months of 1994 but reportedly paid out $100 million to three top-earning bond traders.
"Really strong performers seem to have been paid decently given what the expectations were this year," said Andrea de Cholnoky, a Wall Street recruiter at SpencerStuart.
"Not everyone in the place is walking around in doom and gloom."