Merrill, Citi job cut restraint will be tested

By Tim McLaughlin - Analysis

NEW YORK (Reuters) - When Merrill Lynch & Co Inc MER.N 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), 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."

Aside from a credit implosion in Merrill's fixed-income business, Thain has a lot of profit growth potential. Merrill's global wealth management business, for example, saw 2007 net revenue surge 18 percent to $14 billion. Pre-tax profit rose 41 percent to $3.6 billion. In the fourth quarter, that business attracted $30 billion in net new money, the highest quarterly level in seven years, Merrill said.

Merrill's equity markets and investment banking operations also had stellar years, each posting 2007 revenue growth of 23 percent and 22 percent, respectively.

But if recent history is any guide, Merrill could be forced to cut even within the ranks of global wealth management and investment banking. In the first quarter of 2001, economic uncertainty and unfavorable market conditions triggered steep declines in merger-and-acquisition activity, initial public offerings and demand for new equity and mutual fund products.

Merrill cut more than 6,000 jobs during the first nine months of 2001 and was contemplating more reductions before the 9/11 attacks waylaid financial markets.

Nevertheless, Stephen Spagnuolo, a managing director and investment banking recruiter at Sheffield Haworth, said it is important that investment banks and brokerages don't get carried away in their reductions.

"In the 2000-2001 cycle, investment banks went too far with their cuts," Spagnuolo said. "It took them a long time and a lot of expense to rebuild when the markets came back. Banks are being careful about making cuts: if they don't get it right, and they cut too deep, it is a long and costly process to rebuild."

(Additional reporting by Mark McSherry and Joseph Giannone in New York)

(Reporting by Tim McLaughlin, editing by Leslie Gevirtz)