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Worries widen for New Yorkers

Wall Street's sub-prime woes could slow growth in the rest of the city.

December 27, 2007|Walter Hamilton | Times Staff Writer

NEW YORK — Like a lot of New Yorkers, Peter Poulakakos is holding his breath.

His legendary Wall Street restaurant, Harry's Cafe & Steak, relies heavily on the normally free-spending financial industry, and Wall Street's mounting problems from the sub-prime mortgage crisis are threatening to eat into his bottom line.

Business has held up this holiday season, but next year could be another story.

"When Wall Street slows, everyone slows," Poulakakos said. "It's a tremendous concern."

The booming financial markets helped Wall Street earn bountiful profits in recent years, which in turn made Manhattan's economy and housing market the envy of much of the country.

But sub-prime-induced layoffs and suddenly deflating bonuses appear likely to change that.

Wall Street investment banks have written off about $75 billion in sub-prime losses, and analysts predict tens of billions more. Investment banks have announced that more than 40,000 jobs would be cut. And year-end bonuses on Wall Street could shrink as much as 15% from a year ago.

As a result, the economy of the city and surrounding areas is expected to slow notably, from a 4% annual growth rate in 2005 and 4.6% last year to 2.9% this year and 1.6% next year, according to the federal Bureau of Economic Analysis.

Manhattan, where most employees of Wall Street firms work, still has a lot going for it.

In financial services, expanding areas such as investment banking and commodities trading are offsetting some of the pain in the bond and mortgage businesses. And the weak dollar is prompting foreigners to gobble up high-priced Manhattan apartments and splashy luxury items.

Wall Street's problems have yet to show up in official economic data, and other evidence of a slowing economy remains primarily anecdotal.

Still, there's a creeping sense among some that the economic nirvana of the last few years is giving way to a period of uncertainty and perhaps much worse, depending on how long the sub-prime crisis lingers.

"The next several years for New York are certainly not going to be like what they have been," said Marisa Di Natale, a senior economist at research firm Economy.com.

The turmoil on Wall Street prompted state officials in October to lower estimated tax revenue for the first three quarters of 2007 by $500 million. New York Mayor Michael Bloomberg has imposed a hiring freeze and ordered city agencies to slash spending.

Wall Street is central to New York's economic well-being because, even though it makes up only 5% of jobs, it accounts for 23% of wages.

The industry's payroll in the city last year totaled $59.9 billion, or more than $340,000 per employee, according to the state Department of Labor. A big chunk of that -- $23.9 billion -- came from bonuses, which could fall an average of 10% to 15%, according to Options Group, a Wall Street recruiting and compensation consulting firm.

Even though any drop-off would follow several years of record payouts, it still could damp spending, said Eric Moskowitz, head of compensation consulting at Options Group.

"People are shaken up. It's been a tough second half of year," Moskowitz said. "There are people looking for jobs and a lot of people who aren't going to see the bonuses they saw last year."

One of the biggest question marks surrounds the city's housing market.

Although the housing market in much of the country is well into a downturn, demand for homes in Manhattan, especially at the high end, has remained strong and overall prices have kept climbing.

The median apartment price in Manhattan in the fourth quarter through Dec. 11 was $825,000, up 14% from the final three months of last year, said Gregory Heym, chief economist at Halstead Property, a residential real estate brokerage in New York.

Nevertheless, the first cracks in the facade may be appearing.

The number of homes sold in Manhattan is down sharply. There have been 1,996 sales this quarter as of Dec. 11, compared with 3,415 in the entire fourth quarter of 2006.

Wall Street's turmoil has caused some would-be buyers to drop out of the market, said Charlie Homet, a Halstead broker.

"I've heard from several customers, 'I might lose my job. Now is not the time for me to buy,' " Homet said. "We haven't felt it as brokers yet -- my concern is 'yet.' "

One of Homet's clients, Jeanie O'Shaughnessy, is encouraged that she and her husband have gotten two offers for their two-bedroom apartment in Lower Manhattan since putting it up for sale about two months ago.

The bids -- from a foreign buyer and someone who works on Wall Street -- were only slightly below their $2.95-million asking price, but the couple rejected the offers because they wanted to meet that target.

O'Shaughnessy isn't worried. She and her husband used to work on Wall Street, and they haven't seen a big change in the spending habits of their friends and former colleagues.

"Same vacations. Same second homes," she said. "That's reassuring."

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walter.hamilton@latimes.com

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