Politicians are quick to blame executive greed and big bonuses for causing the financial crisis. And use them to whip up public sentiment for new regulations limiting executive pay, or to at least have bank compensation schemes reviewed by the Fed.
But the real culprit wasn’t excessive compensation, it was excessive leverage, says columnist Andy Kessler, in the Wall Street Journal online. Because of cheap money and weak regulations, risk itself was undervalued. Banks were able to stock up on huge portfolios of real estate loans and mortgages because both they and the regulators didn’t think they were taking on much risk.
As competition and electronic trading reduced their profits in the early 2000s, the big banks redirected their capital into mortgage-backed securities. They earned the 2-3 percent difference between the mortgage rates and their cost of short-term capital. These investments were seen as “safe” low-risk trades. So using leverage to multiply gains on those safe trades didn’t seem particularly risky, says Kessler. And without the access to cheap money and high leverage levels, there would have an investment banking profit crisis, but not a full-blown financial crisis.
Kessler, a former hedge-fund manager, says the knee-jerk reaction to attack “greedy Wall Streeters” is misguided. Instead, there are mechanisms in existence already, including derivatives, that price in the risks of doing business. With a little better transparency, the Fed and the FDIC can use the market to protect the market.
Perhaps the best place to look for your next investment banking job will be among hedge funds. Citadel Investment Group, Chicago’s biggest hedge fund, has taken the bold step of moving aggressively into investment banking, and turning the hedge fund into a more broad-based financial institution.
The firm has even landed its first investment banking file, a $3.5 billion debt-restructuring job for Fontainbleau Resorts LLC, according to an article in Pensions & Investments online. It has attracted many clients for its new institutional sales and trading division, as well.
Citadel has $13.5 billion in assets and has hired some 70 bankers and institutional traders, raiding firms such as Merrill Lynch & Co. and Citigroup. The company is also expanding into other financial services, such as its hedge fund administration business, where it handles trading platforms and other back-end functions for other firms.
Chief Operating Officer Gerald Beeson said the new business divisions could one day be as big or bigger than the hedge fund side of the business. One company source said Citadel already has engagements for underwritings, M&A assignments and restructuring deals. Eventually, they aim to offer the full range of investment banking services, including managing IPOs.
It pays to have a social networking account at Facebook or LinkedIn if you’re looking for a new job in investment banking. In fact, when Nomura Holdings Inc. recently hired about 60 percent of the former Lehman Brothers Holdings Inc. graduate trainees, they used Facebook to locate many of them.
The former recruits were prime targets, given that they were trained and ready for the job. What was surprising, however, according to a column in The Deal.com, was that HR people located and screened some 356 Lehman Brothers Facebook groups to find them.
Turns out nearly half of the Fortune 100 companies are using social networking sites such as Facebook or LinkedIn to find new talent now. Facebook skews a bit younger, with more college grads and entry-level applicants.
Several banks are reportedly ramping up their “fan” pages and groups in an effort to attract young recruits.