The Cyclical Nature of Investment Banking

Investment banking is a component of the financial services industry that has experienced a great deal of controversy over the past few years. At the heart of the financial crisis, investment banking was responsible for the creation of the complex debt instruments that nearly brought Wall Street to its knees. However, investment banking also is responsible for the operation of capital markets that fuel the economic engine of all Western economies.

At its core, investment banking is a cyclical industry. Revenues and opportunities are dependent upon companies looking to transact in the capital markets, generally fuelled by economic growth. While certain firms have operations that focus on assisting distressed companies in recessions, the majority of investment banking revenue comes from debt and equity placements as well as advising in merger and acquisition activities. These merger and acquisition activities tend to be the most lucrative for the firms in terms of revenues, however they are also the most likely transactions to be sidelined at the first hint of economic trouble.

Layoffs and Restructuring

The New York Times recently reflected this reality, reporting that leading investment banking firm Goldman Sachs had cut approximately 50 managing directors due to declining investment banking revenues. Goldman Sachs had cut 3,000 people in 2011 as the European debt crisis began to ramp up. The article also indicates that Morgan Stanley and Credit Suisse have also been active in terms of layoffs and restructuring.

While the outlook today is fairly bleak in terms of economic results, investment banking is still a lucrative industry for successful firms, and it is highly levered to the economy as a whole. If there is a turnaround in the economy, many companies will need to access the capital markets to fund expansions, acquisitions and spinoffs, and these firms will need to hire the top investment banking firms to advise on these transactions. Accordingly, the industry would require an influx of professionals in a short period of time to rebuild capacity that has been removed due to recent cutbacks.

A Risky Business

Overall, opportunities in investment banking as it currently stands are risky at best. While the industry has always been built upon a risk and reward mentality, opportunities are currently very transient for those without decades of experience, and stability is non-existent. Further expansion of the debt crisis in Europe or even more government regulation of the sector will also negatively impact opportunities in the sector. Potential upside does exist for investment bankers however, if the economic recovery occurs more rapidly than anticipated or, if governments adopt more favorable regulatory policies.

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