NEW YORK CITY-Given high volatility in the stock market, a sluggish domestic economy and uncertainty due to the European sovereign debt crisis, Wall Street profits, jobs and bonuses are likely to drop by the end of 2011, according to a new report from the New York State Comptroller Thomas P. DiNapoli. The weakened outlook has been prompted by the OSC’s estimation that the city could lose nearly 10,000 jobs by the end of 2012, which would bring total job losses in the securities industry to 32,000 since January 2008.
Based on the financial sector’s diminished role as an economic engine for New York City and the state, DiNapoli warns that further job cuts will “complicate already tough fiscal situations” for governing bodies who are already struggling to bring in tax revenue and maintain essential services. “These developments will have a rippling effect through the economy and adversely impact state and city tax collections,” he says, in a statement. “As we know, when Wall Street slows, New York City and New York State’s budgets feel the impact, and that is a concern,” he adds.
According to the OSC, securities-related activities--meaning banking, insurance, securities and real estate--accounted for 14% of New York State’s tax revenues and almost 7% of the city’s local economy. From fiscal years 2008 to 2010, city collections from personal income and business taxes fell by more than 50% to $2.3 billion, thus widening the city’s growing budget gap based upon losses in the securities industry.
The banking sector is also likely to experience job losses over the next 12 months, the OSC says. During the downturn, the securities industry lost 28,100 jobs between January 2008 and January 2010, but it regained 9,900 jobs between January 2010 and April 2011. But since then, job losses have resumed and the industry slashed 4,100 jobs as of August, the same month when ratings agency Standard & Poor’s downgraded the US’ sovereign credit rating as well as Fannie Mae and Freddie Mac. As a result, the OSC estimates that each job created (or lost) in the securities industry leads to the creation or loss of almost two additional jobs in other industries throughout the city.
The shift, in part, is a response to the changes in the regulatory environment after the market crash of 2008. The OSC says that new regulations are prohibiting proprietary trading under the Volcker Rule and revising compensation practices to reward long-term performance rather than short-term gains. And while the member firms of the New York Stock Exchange earned $9.3 billion in the first quarter of 2011, profits declined sharply in Q2, and the comptroller forecasts that profits are unlikely to reach $18 billion of all of 2011, which is one-third less than in 2010.
At the same time, a growing disparity in income is also creating a wealth gap. The average salary of the securities industry in 2010 grew by 16.1% to $361,330, which is 5.5 times higher than the average salary in the private sector of $66,120, says the OSC.
The industry is beginning to take note. During NYU’s Schack Institute of Real Estate’s “Keeping the Global City Competitive” London/New York Dialogue on Sept. 27, Peter Solomon, founder and chairman of the Peter J. Solomon Company LP, explained that education and healthcare are slowly replacing financial services as the top job creator in New York, which he said could have “a disastrous effect” on the local property tax base due to the losses in revenue.
“It is not only an employment issue, but the percent of revenue for the state and city can have a material impact,” he said. “The cuts you are beginning to read about will accelerate. In fact, the banking system in the United States, particularly in New York, has been very reluctant to cut people.”
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