Investment bankers, hoping for a recovery in business in 2002, have just had their quietest month in a decade, forcing the cost-cutting knives out again in the absence of an early rebound.

U.S. investment bank Goldman Sachs is already expected to cut up to 2,000 staff, adding to the thousands of jobs already axed by major investment banking groups over the past year.

The banks, including Merrill Lynch, Morgan Stanley and Credit Suisse First Boston, went on a hiring binge during the late 1990s to grab a share of a surge in equity issues and merger advisory business, fuelled by the Internet boom.

When the dot.com bubble went flat and revenues dived last year the industry had to slash costs and jobs.

Now it looks as though 2002 could be even worse.

"The three key drivers - fixed income, equities and m&a - are all looking to have potentially a down year versus 2001 and really that's not what people expected going into 2002," said David Williams, investment banking analyst at Morgan Stanley.

The first quarter of the year is normally busy for equities and capital markets activity, but stockmarket turnover in Europe has been down by about 27 percent and stock prices down by almost as much so far this year from 2001 levels.

"Then you've got Enronitis and other general worries in the market," said an investment banking executive, referring to the fallout from the collapse of energy trading giant Enron, America's biggest ever corporate bankruptcy.

Bankers now fear there will be no improvement in business volumes at least until the fourth quarter.

TIME TO GET LEANER

"The industry will see more job cuts," said one senior m&a banker. "Some of the U.S. firms, such as Goldman Sachs and Morgan Stanley have put on huge numbers of staff in the last three to four years."

Goldman Sachs, the market leader in mergers & acquisitions advisory business, flagged the possibility of job cuts earlier this month.

Chief Financial Officer David Viniar said at a conference in the United States the bank was in the process of reviewing headcount and costs for the current year, but said no decisions had been taken.

Goldman typically culls between five and 10 percent of its worst performers each year, which could equate to about 2,000 of its 22,600 employees.

A Goldman Sachs spokesman declined to comment.

The Wall Street bank will not be the only one suffering.

Merrill Lynch, which cut 15,000 jobs last year in the largest shake-up on Wall Street, has also found 2002 challenging.

Chief Executive David Komansky has said the bank had not yet seen any meaningful improvement in revenues from the fourth quarter run rate.

Banking experts said the slow start to 2002 had come as an unpleasant surprise.

"Most investment banks were holding on to the view that we'd have a bit of a trough and then it would be back to business as usual," said Philip Middleton, banking analyst at Ernst & Young.

"But it looks like they're in for a long period being submerged."

Bonus payments have been slashed, with some firms such as HSBC and Dutch bank ABN Amro apparently dishing out zero bonuses to some staff.

But the downturn could have more far reaching effects over the longer term.

Now the boom is over, the investment banks are discovering there is excess capacity in the industry in terms of people and capital. This may eventually accelerate the drive towards consolidation, if valuations on smaller players start to look attractive, said another industry executive.