Street Addict

When the long-running bull market took a week off in the middle of April, many New Yorkers couldn’t help indulging in a little schadenfreude. After all, the Internal Revenue Service reports that 75 percent of the capital gains earned during the recent boom accrued to just the richest 2 percent of New York taxpayers. Many of the rest of us have often felt shut out, like hired help at a dot-com launch party.

Well, be careful what you wish for. Because if you live in the city, the New York Stock Exchange bell tolls for you, too. We all know that Manhattan’s fortunes rise and fall with the movements of the Dow: Every major recession in the city’s economy since the Second World War has closely followed a sharp contraction on Wall Street. But during the recent boom, few have noticed that instead of diversifying, the New York economy has actually become more vulnerable to upheaval on the Street.

According to a recent study by the Federal Reserve Bank of New York, the city is four times as dependent on Wall Street as in 1969, before a bear market pushed the city to the brink of bankruptcy, and half again as dependent on it as in 1987, when Black Monday on Wall Street dragged the city into a deep recession that hit New York City a year earlier and far harder than the rest of the country. “Because Wall Street represents a much larger share of the city economy than at any time in the past, a significant downturn in the industry could result in more severe employment and income losses than those recorded in the 1970s or the early 1990s,” Fed economists Jason Bram and James Orr warned in their little-noticed report.

Consider the numbers. In 1987, 157,800 people, or about 4.4 percent of the city’s workforce, worked for investment banks and brokerage firms in New York. In salary and bonuses, they took home 11 percent of the total earnings paid to anyone who worked in New York – more than one dollar in ten of the city’s total payroll. To many in the other 95.6 percent of New Yorkers, the wages of Wall Street’s “Masters of the Universe” seemed excessive, even obscene. Little did we know.

“Wall Street’s share of the economy is probably as high as you can get in terms of a city’s dependence on one industry. What’s unique is the volatility. You don’t see 50 percent swings from year to year in Hollywood.”

Wall Street employment and compensation shrank drastically in the aftermath of Black Monday in October 1987, and then swelled again through the past decade. This time, however, many of the lower-paid jobs were relocated out of New York, leaving a purer distillation of the industry’s highest-paid. And that elite grew rich enough to put the Masters of the Universe to shame.

In 1998, Wall Street employed 166,000 people, up slightly to 4.7 percent of the city’s workforce. Now, however, those one in twenty New Yorkers take home 19 percent of the town’s total pay – nearly a fifth of citywide earnings and a more than 50 percent larger portion than in 1987. Last year, Wall Street’s fourth-quarter bonus payments alone rose 20 percent, to total $13 billion. The big firms’ equity-underwriting fees alone came to about $12.1 billion. By comparison, the sum of all the paychecks in the city came to about $250 billion.

“Wall Street’s share of the New York City economy is probably as high as you can get in terms of a city’s dependence on one industry,” says James Parrott, chief economist at the labor-funded Fiscal Policy Institute. “What’s unique is the volatility – you don’t see 50 percent swings in earnings from one year to the next in Hollywood or the federal government.”

In his previous job, as Carl McCall’s chief economist, Parrott was the first to charge that New York’s booming economy was built on a precarious foundation. Charting the city’s recovery from 1990 to 1997, he discovered that 97 percent of the increase in the city’s total paychecks went to workers on Wall Street.

Mayor Giuliani and Governor Pataki instantly blasted the numbers as partisan propaganda. They pointed to the fact that although Wall Street began to rebound in 1990, the rest of the city didn’t turn around until 1992. So measuring from 1990 is like starting a race when one of the contestants is still in the locker room. (Parrott acknowledged that, starting from 1992, when the recovery had begun to spread, securities firms accounted for 56 percent of the total increase in citywide earnings by 1997 – which is still a rather remarkable number.)

In part because of this partisan controversy, the New York Federal Reserve Bank’s Bram and Orr conducted a study of their own, and essentially concurred with Parrott. “People think this recovery is more broad-based,” says Bram, “but the fact remains that Wall Street is actually more important to the city than ever.”

When Bram and Orr released their results last summer, they carefully couched their findings to avoid partisan controversy, and their report was largely overlooked as the market broke new records. “Every time the stock market swoons, we say to each other, ‘Oh, now people will start dusting off our report,’ ” says Bram. “But as long as the market’s going up, people think, ‘Everything is great.’ “

Many people, especially in government, still insist that New York’s economy is much more varied and resilient than it was a decade ago. “The fact is that New York isn’t just Wall Street anymore,” says Stephen Kagann, chief economist for Governor George Pataki. “It’s Wall Street and new media, Wall Street and old media, and Wall Street and tourism, and Wall Street and a whole lot of services that cater to the corporate headquarters here. It’s not just a one-trick pony racing toward the precipice of another downturn on Wall Street.”

Silicon Alley, of course, is the favorite symbol of the city’s rebirth. “Wall Street’s influence in the economy has steadily declined for the past half-decade, mainly because of the growth in new media,” says Clark Halstead, founder of the real-estate brokerage that bears his name. “A huge part of the growth in employment in New York is in all kinds of things related to the Internet. We don’t live or die at every twitch on Wall Street anymore.”

Silicon Alley’s financial clout, however, has been oversold, and besides, the city’s New Economy business is heavily dependent on good old Wall Street. The New York New Media Association says the industry employed about 140,000 people in the city last year, with a total revenue of $9.2 billion – about what Morgan Stanley Dean Witter reports in a quarter. (Forget about earnings.) To stay afloat, New York’s new-media firms raised $6 billion over the past three years in venture-capital funding and public stock offerings. Both forms of support have already begun to evaporate in the face of the market’s recent turbulence. “It would be hard to imagine a downturn on Wall Street that didn’t have a serious effect on the new-media business,” Bram says. (And vice versa – technology companies were 65 percent of the stock-underwriting business last quarter.)

Meanwhile, many of the city’s other core industries never reversed their recession-era declines. New York’s previously fast-growing health-care industry abruptly stopped expanding in the nineties with the advent of managed care. Public employment fell during the recession, too, and Republican administrations have kept it down. Government accounts for 14 percent fewer jobs today than it did in 1987, according to the Bureau of Labor Statistics. Manufacturing employment fell by 44 percent as factories left New York City to save on real estate, transportation, labor, and taxes. Commercial-banking employment shrank by 62 percent, and the printing and publishing businesses also reduced their payroll by 17 percent. Other areas did offset the losses – notably the entertainment industry. The movie business in New York has doubled its payroll, to 44,000, since 1987. Advertising, law, and accounting grew, too. But Wall Street remained the lead horse pulling the sled, adding 13 percent more jobs in New York.

Perhaps it’s unseemly that so much of the city’s earnings ends up in the hands of so few. Far more significant for the New York economy is that many of us, in one way or another, are working for Wall Street firms and their well-paid staffs. The U.S. Department of Commerce estimates that every new job on Wall Street creates two other new jobs in New York. When times are good, investment banks and brokerage firms spend billions on other city industries even before they cut their first bonus checks. From 1995 to 1998, brokerage firms in the U.S. increased their spending 29 percent (to $5.82 billion) for computer and data services, 21 percent (to $2.36 billion) on accounting firms, 162 percent (to $5.32 billion) for real estate, and 408 percent (to $3.37 billion) for law firms. In 1998, firms spent $459 million at restaurants and bars. And for the first time, the brokerage business started spending heavily on advertising: $2.96 billion in 1998. Now we in the media are susceptible to a bear market, too.

Then there is the rising tide of all that compensation. Wall Street’s paychecks pour into car dealers, parking lots, clothing and jewelry stores, construction contractors, nannies and child care, Broadway theaters, upscale food markets, restaurants, and bars. The impact of Wall Street’s spending is everywhere, but it is most glaring in the exorbitant run-up in real-estate prices – owing to the limited supply of 3,000-square-foot Park Avenue co-ops. “Wall Street is still the main motor driving the city,” says Alan Rogers, chief executive of the residential brokerage firm Douglas Elliman.

What crushed New York in the months after Black Monday wasn’t the national recession, which didn’t set in until 1990. Nor was it the decline in stock prices, which didn’t last long. It was the cutbacks on Wall Street after trading volumes plunged. As it turned out, the crash’s impact on the market proved short-lived, but its effect on New York was profound. The securities industry immediately began slashing bonuses and soon started cutting payrolls too, and by 1989 the whole city was mired in cutbacks and layoffs.

The city and state governments suffered the worst: Wall Street’s portion of city income is also its share of the city’s income taxes. When Wall Street’s income dropped, both governments scrambled to raise taxes in order to meet spending obligations, and by raising taxes they exacerbated the recession. Within a few months of Black Monday, housing prices in New York began falling and eventually dropped 25 percent, on average, far further than in the rest of the country. The real-estate market didn’t reach 1987 levels again until 1996. Associates at law firms had seen their pay bid up by 40 percent over the two years before 1987; after Black Monday, the pay increases stopped, and by 1990 there were layoffs. Horace Mann, Dalton, and other elite private schools scrambled to help parents meet tuition payments. Donations to Catholic Charities fell off by about 30 percent and didn’t recover for about 40 months, just as the city’s slowdown increased demand for its programs.

“After 1987, 100,000 American Express Gold Cards left town,” says Clark Wolf, a restaurant consultant who helped open Arizona 206 in 1985. “People from Wall Street are the core of the regular restaurant business in Manhattan.” When bonuses fell, there were “a ton of closings,” he says. In 1987, Wolf says, the restaurant Jams served a roasted free-range chicken with French fries for $32.50. After the crash, it dropped the price to $18.50. “Their customers were furious – they felt like they had been getting ripped off – and the place had to shut down,” Wolf says.

Wall Street is already feeling the pinch from the stock market’s recent volatility. No one wants to sell an initial public stock offering in this climate, and corporate bonds aren’t selling well, either. “A lot of deals are getting shelved,” says Guy Moszkowski, analyst at Solomon Smith Barney. “Some will come back later, and some will slip quietly into the night.” He says equity-underwriting volume, one of Wall Street’s most profitable businesses, often falls off by more than 50 percent from one quarter to the next when the market’s mood turns surly. “We’re in the throes of that right now,” he says.

But no one expects cutbacks like 1987’s. Since then, Moszkowski says, underwriting has always bounced back within six months. And Wall Street firms have other businesses like advising mergers and managing assets that are more stable, even if stock prices dive and trading volumes drop. “Obviously,” says Moszkowski, “my earnings can fluctuate with the earnings of the firm, and I have to prepare for that kind of volatility, but securities is a growth industry.” His take is that the baby-boomers will keep the industry strong. The number of people between 45 and 64 is still growing, and they need somewhere to put their money. “It would take a major change in the culture, a real shock of some sort, to keep people out of the market,” he says.

“It is going to take more than people think for there to be layoffs,” agrees Steven Galbraith, analyst at Sanford Bernstein & Co. “You would feel the compensation cut right away – somebody expecting, say, $2 million would end up with $500,000. But the scarcity value of human capital on the Street these days is psychotically high. In 1998, during the Russian debt crisis, Merrill was the only firm that laid people off, and they got raked over the coals, because when the markets came back right away, Merrill was scrambling to get people and everyone else was cooking with gas.”

Of course, analysts said similar things in early 1987. And Parrott, for one, thinks history could repeat itself in the event of a stock-market cataclysm. “I think they are living in a dream world if they don’t perceive that there is a serious stock-market bubble out there.”

The Russian debt crisis in the fall of 1998 was a reminder to the city that, even without layoffs, a steep drop in Wall Street’s cash flow quickly crimps the city’s economic life. The Manhattan real-estate market virtually froze for weeks while the crisis passed, and prices plunged right away in the Hamptons. “Even then, it was just a hiccup, but the restaurant business really felt it,” says Wolf, the restaurant consultant. “There was about a six-month period of uncertainty when people were tapering off in anticipation of what might happen. Places emptied out during the week, and it was like, ‘What is going on here?’ “

The market’s swift rebound ensured that Wall Street’s largess continued to spread throughout the city. “When the money is flowing,” says Wolf, “a lot of fancy new ingredients start turning up everywhere – the way these days everything has truffles, morels, or foie gras on it, or you get burgers made from Kobe beef.”

The city, no doubt, can survive without Kobe-beef burgers – it might even be better for it. But in a crash, they may not be the only things New York has to take off its menu.

Street Addict