New York – Goldman Sachs Group is reportedly planning to reduce its equity research team in Japan. According to an article on Bloomberg, Goldman has about 70 people on its equity research team in Tokyo, down from a peak of 110 in November 2006. Apparently the co-director of Goldman’s Japan investment research team is among the employees who will leave the company by the end of March. The action reflects decreasing appetite for Japanese equities among global investors, and a worldwide glut in equity research capacity. Goldman is making relatively straightforward cuts now, and we expect even deeper cuts in research staff to follow later this year.
The move would follow a 10 percent reduction in Goldman’s global workforce during the past year. The company cut 4,700 positions over the last twelve months in a drive to lower costs. Goldman eliminated approximately 200 positions in Tokyo in November and December last year, targeting front- and back- office workers in almost all businesses.
Goldman is not alone in cutting back Japanese staff. Nomura Holdings Inc. is eliminating at least 100 jobs in Tokyo. Nikko Cordial Securities Inc., the Japanese retail brokerage unit of Citigroup, is shedding about 1,000 workers. Morgan Stanley, Credit Suisse Group AG and Deutsche Bank AG are also reportedly cutting jobs in Japan.
Our clients are estimating up a 50% reduction in commissions for 2009. Since commissions are the payment currency for proprietary investment banking research, this means that revenues attributable to research will be declining in aggregate up to 50%. While the larger bulge firms will insist on certain minimum levels of commission payments to receive full access to research staff, it is doubtful this will have a major impact on preserving research revenues. Investment banks have had difficulty maintaining this pricing discipline in the past, and when nearly all clients’ commissions are down dramatically, it becomes even harder to enforce. Do you really want to turn away clients in this environment?
This means that capacity will need to be reduced, which is beginning to happen. The full impact of the declining commissions hasn’t yet been felt. Commissions for 2008 were robust because of increased volatility. The broker vote process tends to be a lagging indicator, so the impact will begin to be felt in the spring and summer as the quarterly and semi-annual votes occur. Look for an additional wave of research layoffs then.