The conventional wisdom on Wall Street is currently that top banks will be forced to layoff staff. 

It's already happening. Bank of America (NYSE: BAC) has been paring jobs in its capital markets units; about 3 to 5 percent of jobs may be cut, according to media reports. At some financial services companies, this is happening in stealth mode, without the headlines that are usually reserved for the premiere banks. New York state data shows that the number of investment banking and trading employees dropped 23 percent in August--23 percent! That was the first month of job declines in the past six months. 

Meredith Whitney has generated headlines for her prediction that lots of jobs will be lost. 

For banks, the timing of all this is tricky. No doubt volume remains depressed in key markets that last year were driving profits. All that staffing up to take advantage of high commissions and wide spreads seems to have backfired. Some companies may indeed take a last in, first out approach if they have to significantly and quickly pare their rolls. 

The banking side is a bit trickier. There may actually be pockets of hiring in some markets. In London, for example, banks have been in hiring mode for deal advisory bankers. In the U.S., deal makers are sensing some big deals may soon come to fruition. Banks are more willing to lend again, and there have been some tantalizing signs of a return to big sponsor-backed deals. More hostile deals may also be in the works. Banks are, therefore, not enthusiastic about significantly paring the ranks of deal makers. 

So we're in an interesting situation: The banking side is being counted on to support the trading side. Roles have reversed, as traders have been driving profits for years. The top banks had gotten all too accustomed to that anyway. Traders, of course, have been on the ascent for much of the past decade, edging out the bankers. This was most evident at Goldman Sachs (NYSE: GS), where the Lloyd Blankfein gang hailed from trading roots. 

No one is saying these circumstances are permanent. At some point, volumes will perk up; indeed, more deals will driving volume to some extent. For banks, the challenge will be to figure out a way to ride the volume roller-coaster with minimum staff disruption. Do you pare staff in your sales and trading units now, essentially acknowledging we will be stuck with lower volumes for at least a year? Or do you maintain staff, driven by the belief that the volume dip is only temporary? The last year has proven that this decision is very consequential. You do not want to be caught short-handed when the markets recover. 

For now, however, the role reversal speaks to a larger fact: that bonuses will be much lower this year. And that jobs once again are being lost. In some ways, it was the recovery that wasn't. - Jim