Wall Street’s profits of $8.7 billion in the first half of 2014 were 13 percent lower than the same period last year. This suggests that full year profits for the broker/dealer operations of New York Stock Exchange member firms (the traditional measure of industry profitability) may not exceed the level of 2013, according to a report issued by New York State Comptroller Thomas P. DiNapoli today.

“Wall Street remains very profitable, but earnings may be constrained this year as the industry pays a price for behavior that contributed to the financial crisis,”DiNapoli said. “While the securities industry in New York City has a smaller employment base than before the financial crisis, it remains an important part of the economy and a major contributor to state and city budgets.”

In 2013, Wall Street profits declined by 30 percent to $16.7 billion because of higher noncompensation expenses, which include the cost to settle legal claims stemming from the financial crisis. Since the start of 2009, the six largest bank holding companies, including their securities operations, have agreed to pay an estimated $130 billion in settlement costs. The securities industry, however, does not break out settlement costs from other noncompensation expenses in its public reports so it is not clear exactly how much they impacted profits.

Noncompensation expenses continued to hold down profits in the first half of 2014 and are likely to do so in the second half as well given the announcements of recent legal settlements. The report notes that other factors, such as the pace of rising interest rates and economic growth, will likely have a greater impact on profits in subsequent years. 

Despite its profitability over the past five years, the securities industry continues to downsize in New York City. DiNapoli estimates that the securities industry is 15 percent smaller in New York City than before the financial crisis, totaling 162,400 jobs in August 2014. Over the past three years, the securities industry has shed 10,500 jobs in New York City, including 2,600 lost from August 2013 through August 2014, and has not contributed to the city’s jobs recovery as it did during prior recoveries. 

Six years after the financial crisis Wall Street is still dealing with the fallout. Besides the cost of legal settlements, regulators from around the world have adopted new reforms to strengthen the financial system and to prevent similar conditions that could lead to another global crisis. It will take years to complete the process. Only a little more than half of the rules required by Dodd-Frank, for example, have been completed, and many have not yet taken effect.

Other major findings of DiNapoli’s analysis include:

• In March 2014, DiNapoli estimated that the average bonus (including bonus payments deferred from prior years) rose by 15 percent in 2013 to $164,530, the highest average bonus since the financial crisis.  Current compensation trends suggest that bonuses could be higher for the third consecutive year, supplemented by bonuses deferred from prior years;
• DiNapoli estimates that securities-related activities generated $3.2 billion in tax revenue for New York City in its 2014 fiscal year, or 6.7 percent of all city tax revenue. New York State collected an estimated $13.2 billion from securities-related activities in state Fiscal Year 2013-14, or 19 percent of State tax collections;
• The securities industry is the highest paid major industry in New York City. The average salary (including bonuses) has held relatively steady for the past three years, averaging nearly $360,000 annually. This is more than five times higher than the average salary in the rest of the city’s private sector;
• The industry remains a critical part of the economies of New York City and New York State. DiNapoli estimates that 1 in 9 jobs in the city and 1 in 16 jobs in the state are either directly or indirectly associated with the securities industry. The industry also directly accounted for more than one-fifth of the city’s private sector wages in 2013 even though it accounted for less than 5 percent of the city’s private sector jobs;
• In state Fiscal Year 2014-15, the State expects to receive an estimated $4.5 billion in industry settlement payments;
• New York City’s share of national securities employment, which had hovered at slightly more than 20 percent for the past decade, declined to less than 19 percent in the first half of 2014. In 1990, New York City accounted for nearly one-third of all national securities industry employment. New York State still has many more securities industry jobs than any other state, and twice the number in California, which has the second-highest level of securities industry employment in the nation.

For a copy of the report, click here: http://www.osc.state.ny.us/osdc/rpt9-2015.pdf