Wall Street firms must slash pay and headcount and shed almost a third of their trading-business assets to earn even half the returns they once made, according to Sanford C. Bernstein analysts.

So-called risk-weighted assets at U.S. banks have to shrink 33 percent and European lenders must slice 28 percent, Bernstein analysts led by Brad Hintz and Chirantan Barua wrote in a note to clients today. The firms also must cut their compensation ratio to 40 percent of revenue from 50 percent by firing high- paid managing directors and replacing some traders with computers, they wrote.

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