Investment bankers spend their day advising businesses, individuals, governments, and corporations on capital raising (corporate finance, mergers and acquisitions) and acting as the intermediary in issuing securities (IPOs, structuring debt and equity). As opposed to hedge fund managers or private equity professions, the investment banker’s life is a little less connected to maximizing return on investments (a little less really means a little less – investment bankers certainly are affected by investment returns).
How has the economy affected the investment bankers’ life over the past few years? Well, first some background: before the onset of the financial crisis of 2008 and 2009, employment in the investment banking sector grew at about 5 times the overall economy’s growth rate.
Times were good, really good.
When things went south in 2008, the industry took a beating, with the industry’s employment growth rate going from a year over year high of over 15 percent in the winter of 2007 to a low of almost negative 10 percent in the early fall of 2009. Things picked up for about a year and then went south again in the fall of 2010, bottoming out at about negative 9 percent in the fall of 2011. As opposed to wealth management firms, such as hedge funds and private equity firms, the industry is still shedding jobs – at about a 5 percent clip – indicating that businesses are not too confident right now in doing mergers and acquisition deals, issuing IPOs, or restructuring their debt and equity mix.
Industry growth determined by a variety of factors
When will the investment banking industry pick up? The multi-trillion dollar question depends not only on such things as economic growth, but also on expected profitability, regulation, competing financial sectors, and trading volume.
The factor causing the most pain recently is regulation. As a result of the financial crisis, politicians and government bureaucrats have attempted to control such investment banking activities as trading in the capital markets with their own money or creatively designing certain financial instruments, such as the mortgage back debt instruments that turned sour during the financial crisis. When the individuals running investment banks have greater confidence that regulators will stop pushing for tighter regulation, employment growth will likely move in the positive direction – the real question is, then: when will politicians and government regulators start realizing that investment banking is a vital economic activity that contributes not only to their bottom line, but also to improving Main Street’s economic condition?
If you can answer this question correctly, then you know when investment banking employment activity will pick up.