A longtime Merrill Lynch employee, who did not want his name used, arrived home recently from a vacation to find a letter containing an offer he could not refuse. The missive laid out the details of the “Selective Resignation Program,” which invited Mr. Smith to pack it in after his many years of service. The clincher? For approximately $100 a month each for the rest of their lives, adjusted for inflation, the employee and his wife would continue to enjoy their current medical benefits.

After thinking about it for 30 seconds, the employee took the deal. Who wouldn’t? After all, the cost of health care insurance has been rising at between 11% and 12% annually in recent years, according to Ken Cerini of accountancy Cerini & Associates. As health care costs skyrocket, the perk offered to the employee seems almost too good to be true.

A spokeswoman for Merrill, Selena Morris, says the package given Mr. Smith was part of the firm’s effort to reduce head count by 4,000, which has now been completed. She says that particular offer was targeted at those over 65, which is a “limited number”; according to Ms. Morris, the average Merrill employee is 35.

More broadly, Merrill gave people who met “the rule of 60,” or whose age and years of service combined surpassed 60, a package that included three weeks of severance pay for each year of service, not to exceed 67 weeks, plus 13 additional weeks’ pay.

All of which is to say that downsizing on Wall Street is not inexpensive. Of course, Merrill is not alone in nudging folks off the payroll, or in focusing on older employees. According to Mr. Cerini, “it’s fairly common to offer early retirement to move out upper management and older employees. They are usually pulling down higher salaries and receiving benefits that are no longer being offered. And, firms want to give their younger employees a chance to move up.”

More important, the Street wants to rein in costs. The head count reductions are necessary, according to Punk Ziegel’s industry analyst, Richard Bove. “All the products that drove brokerage industry profits forward in recent years have declined precipitously,” he said. “That includes mortgages, credit derivatives, mergers and acquisitions for the private equity folks, and primary brokerage. The need for people who do these things has contracted dramatically.”

The layoffs at the big firms will be expensive in dollar terms, but they may turn out to be costly in other ways, too. They may fuel market share opportunities for some of their smaller, more flexible rivals.

Another friend was bought out of his expensive contract at a large bank and let go recently — without the standard “noncompete” clause. By day three, he had heard from six headhunters and numerous small firms.

Boutique investment bank Greenhill & Co., for one, is taking full advantage of the bloodletting. “We’ve interviewed more managing director candidates in the past eight weeks than at any other time in the firm’s history,” a co-chief operating officer, Scott Bok, says.

The exodus of talent may prove a boon to firms such as Greenhill, Evercore Partners, and Lazard, recent darlings of the financial services industry whose stocks have languished of late. An officer of one of the banks, who requested anonymity, says it is not only able to recruit from among those laid off, but that many senior people at the big firms are fed up with the hassle of frequent management changes and declining stock prices and are looking for a more entrepreneurial environment.

The boutique banks do face numerous challenges, including a collapse in the everyday merger and acquisition activity that led them to record profits and sky-high multiples in recent years. According to Dealogic, year-to-date announced M&A targets in America have dropped 41% versus last year; globally the decline is 36%. Although strategic activity is holding up fairly well, private equity volume has collapsed due to lack of funding.

In this environment, the results of the boutique banks have been mixed. For example, Lazard reported a 71% drop in first-quarter income on Tuesday. The firm blamed portfolio losses as well as fewer transactions. M&A advisory fees were off 15% year-over-year.

Greenhill’s first quarter was markedly better, with revenues up 73% and net income higher by 121%. The firm reported financial advisory fees of $69.5 million, compared to $36.3 million last year. Greenhill credited its focus on corporate, rather than private equity, activity as helpful in maintaining its growth.

Evercore will report its first quarter on May 12. Of the three firms, Evercore’s stock has fared the worst over the past year, trading down 42%, compared to a 6% drop in the S&P 500. Lazard is off 33% over the same period, while Greenhill is down only 7%.

One of the differentiating factors going forward will be how successful these small banks are in penetrating the restructuring market. According to insiders, Lazard has an edge here. This business is, not surprisingly, on an upswing as more firms face financial difficulties. Bankruptcies are on the rise, after several years of all-time low levels, and companies that specialize in pulling firms from the financial ashes are in great demand.

One of the sector’s leading practitioners, Henry Miller of Miller Buckfire, says: “In our view, we’re only in the bottom of the second inning from the fallout of the recessionary environment and the credit crunch. Many businesses will feel the pinch of adverse consumer sentiment and decreased spending over the next six months. Over that period the extent of the problems will be more evident; the duration of the downturn is likely to be several years.”

Something to look forward to.

peek10021@aol.com