Are Wall Street’s Money Bags Gone for Good?

Although many had hoped that the big dogs on Wall St. would find a way to turn things around in 2011, the numbers show that it just wasn’t possible. Goldman Sachs‘ (NYSE:GS) earnings were down 67% last year, Morgan Stanley’s (NYSE:MS) fell by 42%, and Bank of America’s (NYSE:BAC) investment banking operation net income dropped 53%. Much to the dismay of the financial industry it looks as if the government regulations imposed following the financial crisis of 2008 are a permanent hindrance to making money.

Although the current economic climate is certainly taking its toll on Wall St. profits, it seems as though the real problem facing the banks are the shackles placed on them by the federal government. In 2008 the government curtailed risky lending and established regulations to make the financial industry safer by requiring that banks keep larger capital reserves and adhere to more strenuous lending criteria.

While many hoped that the financial industry might find ways to recoup profits this year, now it looks like the regulations might be a permanent damper.  DealBook quoted Brad Hintz, a senior analyst with Sanford C. Bernstein & Company, who said, “No matter how you cut it, the Goldman Sachs of tomorrow is not going to be the Goldman Sachs of 1999, when it did its I.P.O., or the Goldman Sachs of 2006, when it was at the high point of the cycle.”

Financial executives continue to scramble for …

ways to cut back in order to prevent profits from falling even further. When asked whether or not Goldman Sachs was looking to downsize, CFO David A. Viniar said, “That is one of the most critical questions and a very difficult one to answer,” according to DealBook.

Wall St. employees are also feeling the effects as their compensation and bonuses are being slashed. In 2006 compensation at Goldman Sachs averaged out to $621,000 per employee. In 2011 the number fell to an average of $367,000.  The financial industry is no longer the cash cow that it once was in the eyes of young graduates and is likely driving young talent into other fields.

In banking one of the most important metrics is the return on equity, or in other words how much the bank profited from its capital. In 2006 Goldman Sachs return on equity was 33%, but fell to just 3.7% in 2011. Morgan Stanley has a similar story with return on equity of 23.5% in 2006 but a meager 4% in 2011.

Morgan Stanley’s CFO, Ruth Porat, says the days of 20-30% return on equity are …

likely over, but the company hopes to improve by diversifying. Deal Book quoted Porat who said, “Do I expect to see a return to a return on equity in the mid-20s like the old days? No, but is there a path to the midteens over time? Yes.”

Some optimists still have hope for the industry.  As smaller financial institutions falter, both here in the US and in Europe, the larger banks who can weather the storm will stand to profit. DealBook quoted Roger Freeman, a senior analyst with Barclays Capital who said, “You could see a couple of blockbuster quarters as pent-up demand comes back.”