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January 1, 1999

D.E. Shaw Upbeat Despite Cutbacks

By Staff Reports

The financial losses at its hedge fund last October are showing up on D.E. Shaw & Co.'s balance sheet and payroll, with cutbacks and the elimination of 25 percent of the firm's 1,069 headcount.

But the New York-based firm is upbeat about the prospects for growth this year in its quantitative proprietary trading and U.S. institutional equity-trading activities.

The latter business includes D.E. Shaw's principal portfolio-trading unit, a core unit which last year averaged four principal trades daily. (One trade was reportedly valued at roughly $1 billion.)

Though the fallout from the hedge-fund losses resulted in BankAmerica taking a $372 million writedown on an unsecured $1.4 billion loan with D.E. Shaw, a spokesman for the firm said its quantitative and equity-trading businesses have escaped basically untouched.

"These are strong and healthy businesses which are here to stay," said the spokesman, Nick Gianakouros. "In fact, there is likely to be an increased focus on them."

As part of the planned cost-reduction program, D.E. Shaw has exited the third-market trading business, selling is customer lists and intellectual property to the Jersey City-based Knight/Trimark Group. Terms were not disclosed.

As of press time, D.E. Shaw was seeking a buyer or partner for its online brokerage and Internet-based personal financial-services unit, FarSight Services, and for the related D.E. Shaw Financial Technology. The company hired Wasserstein Perella & Co. to find a buyer or partner for its Financial Products Group. In personal terms, the restructuring is resulting in the loss of 264 jobs, reducing the firmwide headcount from 1,069 to 805.

D.E. Shaw attributed part of its restructuring to the overlap of certain services provided to BankAmerica by D.E. Shaw and separately by NationsBank, which merged with BankAmerica on September 30. But people familiar with D.E. Shaw said the cutbacks and job eliminations are largely due to the hedge-fund losses.