With Layoffs Come Arbitration Suits: Financial-industry job losses triple the pace of last year

By Jessica Papini

Investment Dealers Digest
19 November 2007

(c) 2007 Investment Dealers Digest and SourceMedia, Inc. All rights reserved.

The downfall of chief executives at two leading Wall Street firms, Citigroup and Merrill Lynch, was well-documented, but the credit market mess has also spurred the first big round of mass layoffs since 2001.

Wall Street firms and financial services firms have announced layoffs of as many as 140,000 professionals - nearly three times the pace of job cuts seen last year, according to Challenger, Gray & Christmas, Inc., an employment consultant based in Chicago.

Specialists within areas such as collateralized debt obligations and mortgage finance have been hit particularly hard because most of the credit market problems have been within these two areas. Mortgage and subprime lending divisions within the financial services sector have laid off 76,153 people this year, compared to 12,874 last year, Challenger, Gray found.

"There is no question the Street is going through a period ... where job cuts are heavy and bumping into each other quite a bit, creating a lot of competition for jobs that do open up," says John Challenger, chief executive officer at Challenger, Gray.

Recruiters specializing in Wall Street report having seen an influx of resumes from both those who have actually been laid off and those who are apprehensive about getting a pink slip.

Smaller boutique firms, meanwhile, are taking advantage of the layoffs by hiring some of the talented professionals, experts say.

The movement from a bulge-bracket firm to a boutique has always occurred, but lately it has picked up. "It used to be once you went to a smaller company, it was difficult to get rehired back at a large firm, but that is not the case anymore," says Challenger, adding that, in some instances, employees may get re-hired by their old company when its managers look to rebuild a business line.

However, the current wave of layoffs may result in a tougher environment for many professionals because there are fewer job opportunities on Wall Street. "In past downturns, professionals left the industry," recalls Alan Johnson, managing director of Johnson Associates, a compensation consultant. For those who do shift away from the fast-paced investment banking world, he warns "it can be a culture shock to step out of Wall Street into the real world'."

While some of Wall Street's talent can readily apply their talents in other businesses, there are some skills that don't lend themselves well off the Street. For example, "traders' skills are less transferable to other industries and limited in terms of flexibility," says Challenger.

The current employment picture on Wall Street - especially the meager choice of jobs - may lead to more arbitration cases being filed by former employees hoping to recoup some of their year-end bonus. Of course, the compensation structure for many employees typically comprises a smaller base salary and a large year-end bonus that includes cash, stock and stock options.

"We have been receiving phone calls from employees that have been laid off inquiring about the arbitration process, and it runs the gamut from professionals making seven figures to lower paying salaries," says Michael Deutsch, partner at securities firm Singer Deutsch in New York. "This is the tip of the iceberg and the layoffs will likely lead to a lot of arbitration."

Employees who seek arbitration can do so with the Financial Industry Regulatory Authority (FINRA). In most cases, the severance package offered does not equal the compensation they could expect from their bonus, so many are left with no choice but to arbitrate. A FINRA spokeswoman declined to comment about the pace of arbitrations this fall.

However, not everyone can plead their case to FINRA. Those who signed a separation agreement when they were fired are not able to arbitrate, lawyers say. When an employee is fired, if they don't sign the separation agreement, they risk losing stock that was awarded them. But, those earning seven-figure salaries have nothing to lose if they opt for arbitration, says Deutsch.

Losing a job does not only hurt Wall Street professionals, it is also an emotional letdown for many people. Their age and marital status could impact how they handle being laid off.

"Losing your job is very scary, and a person has to completely revamp their lifestyle," says Dr. Alden Cass, clinical psychologist and president of Catalyst Strategies Group, who consults with financial industry employees.

Fear, anger and shame are some emotions people go through, and it could lead to clinical depression, says Cass.

While younger employees have more options, they also have fewer resources to fall back on, and losing their job can cause them an early mid-life crisis, according to Cass, who adds that "no one wants to have to get a roommate at 30."

"It is a much bigger issue for older professionals, especially those with families, to get laid off," Cass says. In past market downturns, people have chosen to leave the industry for more stable jobs with less volatility, and he predicts more of the same after this latest season of job cuts.