Wall Street banks spend more than $1 billion on severance packages amid heavy job cuts

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America’s biggest banks have spent more than $1 billion on severance pay in the first six months of 2023, underscoring the high price of unwinding Wall Street’s over-expansion during the coronavirus pandemic.

Goldman Sachs, which has been particularly hard hit by the downturn in commercial and investment banking, on Wednesday became the latest major bank to take on recent job cuts, telling investors it spent $260 million in the first half on severance packages. Goldman has laid off about 3,400 employees, or about 7% of its total workforce, this year.

On Tuesday, Morgan Stanley, which has laid off about 3,000 employees this year, said it has spent more than $300 million on staff cuts. And Citigroup said last week that severance checks had added $450 million to its expenses. The bank announced last month that it had nearly completed 5,000 job cuts.

“I think there will be more resizing in investment banking,” said Michael Karp of Options Group, a Wall Street headhunter. “For the rest of the year, it will be a fire-2-for-hire situation at most large companies.”

Line chart of employees in thousands showing US banks looking to downsize

Many Wall Street groups now admit they grew their workforce too aggressively during the Covid-19 pandemic to cope with a surge in trading and trading at a time when working from home was hurting productivity.

The turn from feast to famine in recent years has been rapid even by the standards of investment banking, which has always been a cyclical business. Wall Street’s largest employers have collectively announced more than 11,000 layoffs this year.

Executives are split on whether they will have to make more job cuts – and pay out more severance pay – as the year progresses.

Morgan Stanley Chief Financial Officer Sharon Yeshaya told analysts this week that the bank expected to benefit from a backlog of transactions and wanted to “improve [its] footprint in the best position for the opportunity”.

Goldman chief executive David Solomon said his bank would implement another round of performance-based job cuts, a practice it had suspended during the pandemic before restarting it last year. But Solomon said there were “no other specific plans on staffing now”.

Citi, on the other hand, hinted that more layoffs could be coming. “As we move into the second half of the year, we will be able to focus on the third step of reducing our expense base through a lean organizational model,” Citi Chief Executive Jane Fraser told analysts last week.

Wells Fargo told investors it expects its workforce — which has shrunk by 5,000 this year and 40,000 since mid-2020 — to continue to decline this year. It was one of the few major banks that failed to grow during the pandemic, in part because it operates under a regulatory asset cap following various legal and compliance breaches.

San Francisco-based Wells, whose business focuses more on retail banking than transactions and commerce, raised its spending forecast for this year by $800 million. The vast majority of the increase is related to job cuts. The bank declined to say how much of the cost increase it had already incurred.

Bank of America announced on Tuesday that it cut 4,000 positions, or about 2% of its total workforce, in the second quarter. BofA eliminated positions primarily through attrition and thus avoided having to pay large severance checks.

JPMorgan Chase, the largest in the United States by assets with extensive retail, investment banking and trading operations, is the only major bank to buck the trend. Its workforce rose to 300,000 in the second quarter, an increase of 8% compared to the same period last year.

That doesn’t include employees at First Republic, the California-based lender it acquired in May and whose employees officially joined JPMorgan in July.