Evidence of a Wall Street profits squeeze grew yesterday as investment bankers Goldman Sachs and Morgan Stanley Dean Witter announced lower fourth-quarter earnings.
The reports show that even Wall Street's top firms could not maintain profits in quiet debt markets and with falling prices for proprietary investments. They also signalled that future success may depend on managing costs at a time when markets are slowing but bankers are still demanding more money.
Morgan Stanley said "unusual compensation pressure" in investment banking held down earnings, which failed to meet Wall Street forecasts for a second quarter. But Goldman beat estimates thanks to a lower tax rate in the quarter and better results in controlling salary costs. Both share prices rose, probably reflecting expectations of interest rate cuts. By midday, Goldman was up $6.88 to $92.81, while Morgan Stanley was up $3.81 to $73.06.
Goldman reported $781 million (€877.3 million) in operating earnings, down 5 per cent from $824 million in the third quarter, but up 3 per cent from $756 million last year. Earnings per share of $1.50 compared with a forecast of $1.38 compiled by First Call/Thomson Financial.
It appeared to resist the Wall Street trend towards guaranteed bonuses. Compensation as a ratio of revenues fell to 35 per cent, from 44 per cent last year. For the year, the ratio fell to 47 per cent from 48 per cent.
Morgan Stanley, long known for its tight cost controls, said its compensation ratio rose to 31 per cent in the quarter from 23 per cent the year before. For the year, the ratio rose to 41 per cent from 38 per cent. Robert Scott, Morgan Stanley chief financial officer, said booming markets in the first half of 2000 led to increased hiring costs in the second.
