Monday’s announcement that two storied institutions, Bank of New York and Pittsburgh’s Mellon Financial, will merge to create one firm with $17 trillion in assets is an apt illustration of how changes in the financial-services industry affect Gotham’s economy—and of how Gotham must work to make sure that industry keeps its global headquarters here.
First, some background: Bank of New York, established in 1784, is America’s oldest bank, founded by Alexander Hamilton, who became the nation’s first treasury secretary. Mellon opened in Pittsburgh in 1869; one of founder Thomas Mellon’s sons, Andrew, managed the bank through Pittsburgh’s industrial heyday and later served as treasury secretary as well.
The two banks plan to merge for two reasons. First, they want to cut costs within the larger of their two business lines, the boring but profitable task of asset custody.
As “custodians” of other financial firms’ assets, Bank of New York and Mellon are giant back offices to the rest of Wall Street, doing workaday tasks for big clients like mutual funds, pension funds, and hedge funds. This work includes processing stock trades, issuing dividend checks, and preparing statements for those clients’ individual customers. A customer who has a brokerage account at a small firm, for example, quite likely receives a statement prepared by a BoNY or Mellon subsidiary, not by his own firm.
After the merger, BoNY Mellon will wring efficiencies out of this business, paring about 4,000 jobs, or about 10 percent of its workforce.
Second, the firms want to expand in the smaller of their two fields, the more glamorous business of asset management. Asset managers are different from custodians in that they advise their clients, including pension funds as well as wealthy individuals, on investment strategy. In fact, BoNY bid for Mellon in large part because Mellon brings to the partnership nearly $1 trillion in managed assets.
What does this historic deal mean for New York?
First, although BoNY says it’s too early to speculate, it seems more likely that New York will lose rather than gain middle-class jobs in the immediate cost-cutting (lots of these jobs are already in New Jersey, anyway, but the firm has more than 8,000 workers in Lower Manhattan and Brooklyn). While Bank of New York Mellon will have its headquarters in New York, it will nevertheless maintain a “strong and growing presence” in Pittsburgh, including making it home to some combined divisions and adding as many as 2,000 jobs over the next few years. This decision makes sense, since the cost of doing business is cheaper there than here.
But New York will probably gain higher-end jobs in the long run in place of at least some of the middle-class jobs lost. Why? For one thing, doing Wall Street’s back-office work is technologically more challenging than it once was. As the Wall Street Journal reported Tuesday, the new BoNY Mellon must design and run sophisticated software to keep up with “increasingly complicated global investment strategies used by hedge funds and other sophisticated money managers.” For these innovations, BoNY needs top-notch engineers. These well-paid workers more than pay for themselves (and the office space they use) through the productivity their creations generate. Talented people in this high-end field, as in other top fields, enjoy living and working in New York City.
There’s likely a second piece of good news for New York in the merger: as BoNY Mellon expands its high-end asset-management business, it will doubtless hire new highly paid workers here for that business, too. BoNY Mellon must have top people in Gotham if it wants to thrive in asset management, because the competitors, as well as many of the best potential employees, are here already.
In fact, the merger is likely to follow Gotham’s overall employment trend of the past several decades: while the city has a small and shrinking share of the nation’s securities-industry jobs, it has a large and growing share of U.S. securities-industry wages. While today only 5 percent of Gotham’s workers earn their living in the securities industry, they make more than 20 percent of the city’s wages, with an average salary of nearly $300,000.
But the merger highlights a more sobering trend, too: the growing weight of Europe and Asia in the financial markets. In fact, a quarter of BoNY Mellon’s revenues will come from outside the United States, and BoNY CEO Tom Renyi said Monday that the international share of the combined firm’s business likely will grow.
Capital moves quickly, and for many reasons. One of those reasons, as the independent Committee on Capital Markets Regulation advisory body reported last week, is that American regulations on capital, including the five-year-old Sarbanes-Oxley law, are cumbersome and costly compared to regulations in London and continental Europe.
So the merger should also serve to remind local and national politicians that they must fiercely guard the city’s reputation as the capital of capital—or financial firms that find they can’t beat the competition will simply join it.