From the monthly archives:

August 2012

In a new era of financial regulation the Dodd-Frank Act stands out in front.  The act that created the Consumer Financial Protection Bureau (CFPB) is being praised for seeking less corruption, fraud, and financial malfeasance within, among other institutions, banks.

What Does the CFPB Do?

Essentially, the CFPB works to build a database of consumer complaints – the more complaints the bureau has the bigger it becomes. Says the CFPB, “Give us your input on prepaid cards. Consumers use prepaid cards to pay bills, make purchases, and to get cash. While these cards often look like and in some ways act like debit cards linked to bank accounts, they’re often very different. We want to learn more so that we can understand what protections might be needed for consumers – and we want your input.”  It’s only a matter of time until the streams of complaints coming in from consumers cause problems for businesses.

The big problem for small business

Though the CFPB may want to help consumers, it forces investment banking departments to turn new business to the streets as compliance costs rise and ‘riskier’ ventures are no longer financial viable.  Of course, cutting clients means less business, which means that the investment banking sector could be set to shrink.  Unlike the retail banking sector, where rising costs have already been shown to get passed down to consumers (free checking accounts, for example, are largely a thing of the past), investment banks don’t have as much flexibility, often operating on measures of the costs vs. the benefits of taking on a client. Retail banking departments don’t have these sorts of problems – a client deposit is a client deposit.

What does it mean for you?

If you’re looking for a job in investment banking you may need to look much further than you did before.  As Reuters mentioned at the beginning of the year, investment banks have the need for some significant cost cuts: “Even factoring in further headcount reductions of up to 20 percent and a 5 percent cut in non-compensation costs, returns would still be too low.

To reach a 13 percent ROE, banks will have to slash pay too – by a hefty 23 percent per head on average, JPMorgan reckons.  This was of course before JPMorgan’s massive trading loss and its speculated role in the recent LIBOR scandal. CFPB regulations will further cool jobs in investment banking and the financial sector generally.  Anyone thinking about getting a job in finance should make sure to take the CFPB into consideration and keep up to date on its cases.

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Investment banks Morgan Stanley, Citigroup, Bank of America, Goldman Sachs, and Deutsche Bank have announced plans to cut operating costs that include eliminating jobs. The cost cutting measures follow decline in trading and investment banking revenue in the second quarter due to reduced deal and trading volume. Chief among the reasons the investment banks attribute to decline in M&A and trading activity is the concern that Greece would leave the euro and the region’s sovereign-debt crisis would spread to other nations.

Morgan Stanley cuts pay pool for investment bank

The sixth-largest U.S. bank by assets, Morgan Stanley, paid a total of $3.53 billion in the first six months of the year to investment bank employees in salaries, bonuses and benefits. The amount was 15 percent lower from a year earlier. In addition, the bank plans to cut staff strength by another 700 in the second half of the year, bringing total 2012 staff reductions to 4,000.  Morgan Stanley’s company wide compensation expense, the firm’s largest expense, was down to $8.1 billion for the first six months this year from $8.9 billion for the corresponding period in 2011.

Deutsche Bank to cut 1,000 investment bank jobs

Deutsche Bank is planning to cut about 1,000 jobs at its investment bank. The cuts will slash the bank’s investment banking staff by roughly 10 percent and will target senior investment banking and back-office jobs outside of Germany. The decision to cut jobs is somewhat of a surprise since bank officials said in April they had no plans to trim the investment banking division. However since April, many companies have either withdrawn or delayed their planned initial public offerings and other deals due to uncertainty surrounding Greece’s national elections and the Spanish bailout.

Citigroup to cut 350 more jobs in investment bank, trading

Citigroup plans to cut about 350 additional jobs this year from the securities division, which includes investment banking and trading operations. The reductions amount to about 2 percent of the unit’s staff. The company attributed the additional job cuts to the need to control expenses in light of weak market conditions. Back in January, Citigroup announced plans to cut 1,200 people to save $600 million this year at the securities and banking division.

Goldman Sachs to cut senior positions,  hire junior employees

Goldman Sachs is embarking on a new round of cost cutting measures, which will include laying off some senior employees. The investment bank has increased its planned annual cost reduction target to $1.9 billion from the previously announced target of $1.4 billion. During the June quarter, investment banking revenue decreased 17 percent compared to the corresponding prior year quarter. The bank plans to cut senior positions, but it still plans to hire junior employees through channels such as regular campus recruiting.

Bank of America Plans $3 Billion in New Cost Cuts

Bank of America plans to slash costs by $3 billion annually in commercial lending, investment banking and wealth management. The bank did not detail planned job cuts in the latest round of the plan. It shrunk its workforce by approx. 12,000 at the end of June.

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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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European Crisis Impact on Investment Banking Jobs

August 6, 2012

The investment banking industry is notoriously cyclical; with abundant opportunities and bonuses in good times and layoffs during weaker economic conditions. However, the recent volatility in capital markets around the world has caused these business cycles to dramatically shorten, making employment security a threatened concept amongst investment bankers. Market Fluctuation Slows Growth In the first […]

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