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JERSEY CITY-The most recent turmoil in Manhattan—Lehman’s demise, the Merrill Lynch/Bank of America merger and the AIG bailout—have roiled markets all over the world, and according to experts, the results are likely to be very seriously felt close to home.

“New Jersey has significant exposure” to this crisis, says Dr. James Hughes, dean of the Edward Bloustein School for Planning and Public Policy at Rutgers University. “The Hudson River waterfront is Wall Street West, and we have some other operations like Merrill Lynch in Hopewell, which has thousands of employees. We have a lot of direct exposure in that we have a way above average number of jobs in the major financial units, both here in New Jersey and in Manhattan.”

More than 3,000 people work for Lehman Brothers and Merrill Lynch in Jersey City, which attracted a number of major financial companies after September 11. Merrill Lynch’s presence in the city is so large that 101 Hudson St., Jersey City’s second tallest building and site of the company’s headquarters, has been nicknamed the Merrill Lynch Building. In all of New Jersey, almost 270,000 people work in the financial sector, according to the Department of Labor statistics.

Although Jersey City has so far managed to ride out the downturn relatively unscathed, this latest news may be the proverbial straw that breaks the camel’s back.

“Both companies have large blocks of space in New Jersey that may go on the market, and at very distressed prices,” predicts Barbara Gross, executive vice president with Sheldon Gross Realty Inc.

“Merrill Lynch’s operations in Jersey City are more general back office operations,” says Hughes. “That’s duplication for Bank of America. Bank of America has a history, with their acquisitions, of not being hesitant to make major cuts that are required.”

Merrill Lynch’s operations to the south, in Mercer County, may fare better. “The company’s biggest facility is Hopewell, which is their wealth management division,” explains Hughes. “That’s what Bank of America is really buying, that’s not their expertise, so that should pretty much be held whole.” Still, Bank of America’s plan to realize a savings of more than $6 billion from the merger does not bode well for Merrill Lynch employees.

Even if extra office space is absorbed, the ramifications of thousands of New Jerseyans being out of work are sure to be felt keenly and quickly. “Additional effects on the state economy will be felt in terms of reduced income tax revenues, particularly New Jersey’s gross income tax, which relies heavily for revenues on high income tax filers,” says Dr. Joseph Seneca, a professor at the Bloustein School. “Many of those high net worth individuals are in the finance sector. It’s hard to see that Wall St. bonuses and capital gains are going to be significant sources of taxable income this year for New Jersey.”

With consumer spending already down due to the credit crisis and the general economic downturn, the loss of significant salaries could be disastrous for a state already billions of dollars in debt. But once the clouds part, this could end up being a good experience for the financial industry.

“This may be an accelerated part of a transformation that has to take place as the major houses have to deleverage and recapitalize,” says Hughes. “The financial industry grew much faster than the overall economy in the 1998-2006period because they were able to borrow abundant, cheap, seemingly risk-free global capital. That business model is history, so they’re going to be smaller institutions with fewer employees and they’re going to be much more cost sensitive. It was essentially a wild economic party with all the new imaginative borrowing and lending schemes, but wild parties are followed by prolonged economic hangovers. We’re just starting the hangover phase.”

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