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October 30, 2007

DiNapoli’s Wall Street Report Sounds a Cautionary Note

Decline in Third Quarter Profits Followed Strong First Half

New York State Comptroller Thomas P. DiNapoli today released a report that details the performance of Wall Street and its impact on New York City and New York State. The comprehensive report concludes that turmoil in the credit and housing markets will take a toll on Wall Street profits, jobs, bonuses and tax revenues for the City and the State, but the magnitude of the impact will be determined by the depth and duration of the credit crunch. The fourth quarter will determine the outcome for 2007 and will set the stage for 2008.

"Wall Street’s fortunes are cyclical in nature. This year, a strong first half was tempered by a weaker third quarter,” DiNapoli said. “The fourth quarter will ultimately define 2007. Wall Street is a major driver of City and State revenue. This report, along with the Governor’s mid-year update to the State Financial Plan that forecasts lower revenues, sounds a cautionary note for 2008 and underscores the need for prudent spending.”

The report finds that Wall Street accounts for nearly 9 percent of New York City tax revenues and up to 20 percent of New York State revenues. In addition, while Wall Street accounts for only 5 percent of the jobs in the City, it generates approximately 23 percent of wages.

The Comptroller noted that the Mayor and the Governor have taken the recent developments on Wall Street into account as part of their budget planning. The Governor’s update today of the State Financial Plan projects tax revenue will be $500 million less than initially estimated. And last week, the City revised its four-year financial plan lowering its expectation for Wall Street tax revenues.

The report also analyzes the financial results of the seven largest securities firms headquartered in New York City. These firms, which are highly diversified in their activities and markets, posted record profits in 2005, 2006 and the first half of 2007. While profits declined by almost 65 percent during the third quarter of 2007, profits for the first three quarters of the year are still slightly ahead of last year’s record pace due to strong gains during the first half of the year.

The report concludes that although the 2007 bonus pool will be smaller than last year’s record level, the decline may be modest given the strong performance of the large securities firms during the first half of the year and because bonuses tend to decline at a slower rate than profits. Some firms and some employees, such as those working in mortgage related areas, will experience large declines, while others, such as those working in investment banking, may receive even larger bonuses than last year. The outcome will ultimately depend on performance during the fourth quarter.

According to the Comptroller’s report, the securities industry added 10,000 jobs through the first three quarters of 2007, which exceeds the 9,500 jobs Wall Street added in 2006. While the industry has already announced plans to shed jobs, job losses could accelerate in 2008 if fourth-quarter profits do not recover sufficiently and pressure mounts on financial firms to cut costs.

The DiNapoli report also found:

  • The average salary on Wall Street grew by 17 percent to reach $339,910 in 2006, while the average salary in the rest of New York City’s economy grew by only 5 percent to $59,530;
  • New York City accounts for 90 percent of all securities jobs in New York State and more than 22 percent in the nation;
  • During 2006 and the first three quarters of 2007, Wall Street added jobs at a 5.6 percent rate, which was 3.7 times faster than gains in the rest of the City’s economy;
  • Each job added on Wall Street results in the creation of two additional jobs in other industries in the City and one additional job in the suburbs. Consequently, job losses on Wall Street will reverberate through the City and State economies;
  • Between 2003 and 2006, Wall Street was responsible, both directly and indirectly, for 41 percent of the City’s jobs gains and almost 38 percent of the State’s job gains;
  • The City collected over $3.3 billion in tax revenue from the securities industry in FY 2007. New York State collected $9.6 billion in revenue in State fiscal year 2006-07;
  • The New York Stock Exchange and the NASDAQ accounted for just under half of the dollar value of all equity trading in the world in 2006;
  • Reflecting the growing global diversification of the securities industry, the seven largest financial firms headquartered in New York City received nearly 43 percent of their revenues from non-U.S. sources in 2006, up from 38 percent in 2005 and
  • Six of the top ten firms in the world for completed mergers and acquisitions in 2005, 2006, and the first three quarters of 2007 are headquartered in New York City. These New York–based firms have also consistently placed among the top ten for global equity underwriting.

Click here for a copy of the report.


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