Merrill, Citi job cut restraint will be tested

By Tim McLaughlin - Analysis

NEW YORK (Reuters) - When Merrill Lynch & Co Inc (MER.N: Quote, Profile, Research, Stock Buzz) Chief Executive John Thain said last week he did not expect to cut "thousands and thousands of people" after reporting nearly $10 billion in quarterly losses, some analysts and investors were surprised at his restraint.

Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz), which lost $9.83 billion in the fourth quarter, also surprised the market by cutting only 4,200 jobs in the quarter when four times that number was expected by some.

In the coming weeks, though, Merrill's and Citigroup's resolve not to cut will be tested as fears of a U.S. recession rattle European and Asian stock markets.

Overseas growth, which could offset declines in U.S.-based operations, does not look as certain after Japan's benchmark Nikkei .N225 dropped 5.7 percent, the worst one-day loss since the session after the September 11, 2001 attacks on the United States. Mirko Mikelic, portfolio manager at Fifth Third Asset Management, said he expects investment banks to make deeper cuts than what they're saying now.

"Yes ... more and more, as they realize it is not going to be a quick recovery," Mikelic said. "We expect it to be more drawn out. That's the problem."

Analysts at Goldman Sachs said they expect Citigroup's management to reduce its headcount up to 7 percent in coming months. That would translate into the elimination of about 26,250 more jobs, based on Citigroup's year-end headcount total of 375,000 employees.

Merrill ended 2007 with a global headcount of 64,200 employees, largely unchanged from the third-quarter, despite about $24 billion in second-half write-downs. Merrill has cut about 1,000 fixed-income jobs, mainly in its subprime mortgage operations, but gained an equal number of people when it bought First Republic Bank.

"This is not a case where we're targeting thousands and thousands of people," Thain said on a conference call Thursday. "They will be selective reductions in places like structured credit and probably there's still more opportunity to do headcount reductions in our various mortgage origination platforms. So I think those are the two places you'll probably see, but it's not going to be dramatic."