Can state's financial firms dodge the bullet?
Some predict cuts as Wall Street suffers
Massachusetts' financial services industry has so far not been hurt by the troubles afflicting the stock and credit markets, but Wall Street's problems will eventually hurt profits here and force job cuts, analysts said.
Some of the nation's flagship financial firms have reported bruising results, and their problems have weighed on the stock markets for weeks. The Standard & Poor's 500 index is down 13 percent for the year, but the large regional banks included in the index are down 31 percent, while investment managers are off 18 percent.
Yesterday, Wachovia Corp., the large financial services firm based in Charlotte, N.C., reported an $8.9 billion loss for the second quarter and said it would cut $2 billion in costs over the next 18 months and more than 6,000 jobs.
Savings and loan giant Washington Mutual Inc. reported a $3.3 billion quarterly loss and announced a $1 billion cost-reduction program.
Last week, Merrill Lynch & Co. of New York reported a $4.6 billion loss in the second quarter, following a loss of nearly $2 billion in the first quarter. It has cut more than 4,000 jobs this year.
Closer to home, however, financial companies are not as affected by the mortgage-related losses that have hit the rest of the country.
At Sovereign Bank, which reports earnings today, business remains sound and Massachusetts employment is steady, said spokesman Andrew Gully. Enterprise Bancorp Inc. of Lowell last week reported second-quarter earnings of $1.8 million, down from $2.3 million a year ago. But the decline, said chief executive Jack Clancy, was due to increased investments in expansion, including a new branch in Methuen, the cost of which cut into earnings.
But if the stock market continues to turn in losses, as it did last month, then Massachusetts firms will certainly see conditions worsen.
The forecasting firm Moody's Economy.com projects that financial services in Massachusetts, including real estate and insurance firms, will shed about 9,000 jobs, or 4 percent of employment, by the end of 2009 because of the trouble afflicting financial markets and the economy. The New England Economic Partnership, a nonprofit forecasting group, projects losses of about 5,000 financial services jobs by the end of next year.
Many Massachusetts firms, such as mutual fund companies, make money based on the value of the assets they manage. When the value of stocks and other assets declines, so do revenues.
"The Massachusetts industry is so tied to national financial markets that I don't see how it can escape unscathed," said Gus Faucher, director of macroeconomics at Moody's Economy.com, of West Chester, Pa.
Local financial companies, particularly investment firms, were hit hard in the last recession, when the collapse of the technology bubble and 2001 terrorist attacks sent stocks plunging. Employment at investment firms in Massachusetts fell 17 percent before hitting bottom in 2004.
Analysts don't expect that kind of plunge during this downturn, but signs of a slowdown are emerging. Employment in the broader financial services sector, excluding real estate, is down slightly from a year ago, after growing more than 1 percent in the previous year and 2 percent the year before that, according to the Labor Department. Employment growth in the investment industry slowed to about 4 percent in the past year, compared to 6 percent in the previous year.
In another sign, BostonCoach, a limousine service catering to the financial firms, confirmed last week that it recently laid off 17 employees. The company is owned by the mutual fund giant Fidelity Investments of Boston.
There's no question the business has been affected by the economy, said a BostonCoach spokeswoman.
C. Kevin Landry, chairman of Boston buyout firm TA Associates, said the financial market turmoil has slowed activity in his industry, as tighter credit and higher interest rates make it tougher to borrow and the economic downturn hurts the value of companies owned by buyout firms. Buyout or private equity firms combine investors' money with borrowed money to buy companies, work to increase their business or value, and resell them at a profit.
TA Associates, which employs about 70 in Boston, has done about half as many deals as a year ago, meaning hiring and expansion will slow, Landry said. He said the firm this year hired three people who recently earned MBA degrees, but appears unlikely to do any hiring next year.
The financial services industry, which includes investment, banking, insurance, and real estate firms, accounts for one in 14 jobs in Massachusetts. The economic impact is even broader because financial services workers earn high incomes, averaging $95,000 a year - nearly twice the state average. In addition, financial services help support another large and high-paying sector, professional and business services, which includes accountants, lawyers, and consulting firms.
The Massachusetts situation pales in comparison to what's happening on Wall Street, where firms have lost billions of dollars and slashed thousands of jobs. CitiGroup Inc. this year announced more than 10,000 job cuts.
Wall Street firms specialize in investment banking, or raising capital for new stock and bond offerings. In recent years, they offered securities backed by risky mortgages known as subprime, many of which have become virtually worthless. Massachusetts companies have much less exposure to the subprime crisis, analysts said. They specialize in money management, with clients investing for retirement and other long-term purposes.
"People are not going to take their money out right away," said Atreya Chakraborty, a finance professor at the University of Massachusetts at Boston. "There is going to be a contraction, but there won't be structural changes. They won't close down."
Anne Crowley, spokeswoman for Fidelity Investments, said the privately held company reported strong earnings in the first quarter of the year and expects to do the same for the second quarter, which ended June 30.
Fidelity expects employment in Massachusetts, now at about 12,000, to remain stable, Crowley said.
State Street Corp., which employs about 13,800 locally and provides services to the investment industry, reported last week that second-quarter profit rose 50 percent from a year ago. State Street has added about 400 jobs in Massachusetts this year, and chief executive Ronald Logue expects his company to hire more. "We've reported good numbers, we're growing, and we need people," he said.
But if stocks continue to slump, analysts said, revenues and earnings could follow.
"If the market stays down, it will affect employment," said Jim Klocke, executive vice president at the Greater Boston Chamber of Commerce. "The big question is what happens in the next two or three quarters."
Robert Gavin can be reached at rgavin@globe.com. 