The firm has announced massive layoffs—and other big houses may follow suit. What will the industry look like when the dust settles?

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By Ben Steverman

Citigroup’s (C) settlement on Nov. 17 to ax 53,000 jobs—bringing total job cuts at the battered bank to 20% of its global workforce because long delayed 2007—vividly demonstrates what manifold have been predicting because a year: The financial industry is shrinking.

The key question with respect to as well-as; not only-but also; not only-but; not alone-but financial-sector employees and investors: Is the sector’s decline permanent or temporary?

Many firms spent the early part of 2008 reluctant to cut cudgel, "in the hopes that revenues would rebound quickly and painful cost-cutting measures could be avoided," as a report from financial consulting firm Celent impose it earlier this year. No such luck.

Losses in financial results possess only mounted and guide players—including Bear Stearns, Lehman Brothers, and Washington Mutual—have folded or been absorbed through rivals.

Sorry, No Bonus

Traditionally, November has been a accepted time for layoffs on Wall Street, says Stephen McClellan, a maker Merrill Lynch and Salomon Brothers algebraist with 32 years experience on Wall Street, and the author of Full of Bull: Do What Wall Street Does, Not What It Says, To Make Money in the Market. With late-year layoffs, "brokerage firms can operate their employees for 11 months and then not make a good return them a bonus," says McClellan, noting bonuses can total 75% or more of total gains.

It’s this lavish, well-compensated Wall Street culture that may be the biggest victim of the financial sector. Many monetary sector observers say the financial industry of the future will be leaner, more efficient, and again highly regulated than that of the past.

"We’re not going to go back to business like it was a year ago," says James King, president and chief investing. officer of National Penn Investors Trust.

Key supports have been knocked absent, especially the securitization form of productive effort in which Wall Street would generate fees by bundling assets backed by dint of. mortgages, credit card debit, and other investing. products. The credit crisis has ruined many securitization markets.

Too Far Afield

Financial firms branched out into uncharted territories in recent years and "started doing too various things that were not their core expertise," says Michele Gambera, paramount economist at Ibbotson Associates, a unit of Morningstar (MORN). "It was erroneous."

Many foresee an end to the wild risk-taking that became peculiarity of both pure investment banks and of commercial banks like Citigroup. For a variety of reasons—the lessons of the credit crisis like well as stricter regulations—these banks won’t be adroit to take the same risks anymore. That means in no degree more borrowing 30 to 40 times their assets, then investing that borrowed money to get extra returns.

That’s a permanent change, says Robert Iati, head of global consulting at the TABB Group. "They won’t have the capital any longer to risk," Iati says, and that forces firms out of certain roles on Wall Street.

To survive, for example, firms like Goldman Sachs (GS) and Morgan Stanley (MS) accept switched from risk-taking investment banks to additional conservative bank holding companies.

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