Monday, January 02, 2006

Wall Street Banks Pledge to Avoid Spending Excess

The Financial Times, David Wells, 2 January 2006

A hiring spree helped push up banks' expenses on Wall Street last year. But several leading banks that managed to keep revenues ahead of their rising costs are vowing to keep a rein on spending, and avoid repeating the excesses of the past.

Goldman Sachs, Lehman Brothers, and Bear Stearns all produced record full-year profits in 2005 and say they are eager to invest in people, and in business services, to keep profits growing this year. But they also claim they are keen to avoid the meltdown that followed the previous boom, should markets turn for the worse.

After the technology stock bubble burst, Wall Street weathered its biggest loss of jobs in a quarter of a century. Those employees who remained on staff had to give up many of the perks they had been offered to keep them from defecting to internet start-ups. Incentives included concierge services, increased meal allowances and personal Bloomberg terminals.

Nonetheless, banks are still pinching pennies, making sure they get bulk discounts when buying services, combing through telephone bills, and outsourcing tasks to cheaper workers in India.

Goldman Sachs had operating expenses of $16.51bn in 2005, an increase of 19 per cent. But the Wall Street bank was able to boost revenues by 21 per cent to $24.78bn and net income by 23 per cent to $5.61bn. Goldman spent $11.69bn on compensation and benefits, up 21 per cent from a year earlier, and its non-compensation expenses – such as office space, communications and fees for consultants and lawyers – rose 14 per cent to $4.82bn.

Lehman and Bear Stearns also managed to boost revenues and profits more than expenses.

But as Wall Street hires, it can become harder to control costs. Goldman and Bear Stearns boosted staffing levels by 8 per cent in 2005 and Lehman increased its staff by 17 per cent. All three plan to hire this year and will have to be diligent when awarding compensation, as well as when choosing and allocating office space, desks, phones, BlackBerries and the like.