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DE Shaw, Bank of America (BAC) Layoffs Foreshadow Harsh New Reality for Wall Street

 September 30, 2010 12:43 PM

After the passage of the Dodd-Frank financial reform bill, there was a collective feeling of ‘what now?' in regards to the fate of Wall Street firms. Although a cloud of uncertainty had been lifted from over the sector, the implications of corporate restructuring due to the bill were potentially damaging. Financial stocks have lagged this latest market leg higher, and we are starting to see a reason why. Thanks to new regulation (and a steady outflow of capital from the equity markets) the pie is shrinking for Wall Street. But when it's all said and done, maybe that's not the worst thing in the world.

The Volcker Rule, although watered down in its final form, was the most game-changing inclusion in the legislation, precluding big banks from proprietary trading and owning large stakes in hedge and private equity funds. The rule does not officially take effect for several years, thus firms are expected to undertake the necessary changes over time. Most companies though, have wasted precious few months in making preparations. Each firm has come up with its own solution for best dealing with the Volcker Rule, but most have shared at least one common denominator: fewer employees.

Bank of America, according to a person briefed on the decision this morning, is already planning to eliminate up to 30 proprietary trading jobs, or almost one-third of its proprietary trading division. JPMorgan has revealed plans to move proprietary traders into its Asset Management division in order to salvage some of their prop trading desks, reported the New York Times on Monday. Goldman Sachs will reportedly dissolve or spin off its proprietary trading teams entirely. Credit Suisse recently forked $425 million for a stake in Swiss bank York Capital (a deal that is compliant with the Volcker Rule, which allows banks to own hedge fund managers while limiting the investment of the bank capital in funds itself). Despite strategies to deal with the impending regulations, these firms have already seen an exodus of talent to private equity firms and hedge funds, such as Blackstone. But many think that when the dust settles, not every cute puppy will be able to find a new home.

While much of the direct result of the Volcker rule will be a reshuffling of the financial services sector, the end result of increased regulation will be significant retrenchment within the industry.

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