From the monthly archives:

November 2012

In the United Kingdom, and much of the western investment banking world, financial institutions are facing greater scrutiny and regulation. This is especially true in regards to increased requirements for “ring fencing” and the segregation of investment banking from retail operations. According to the Financial Times, in the United Kingdom, the larger financial institutions are concerned that the proposed new regulations and restrictions would great an unfair competitive landscape, as the rules would include exemptions for smaller institutions. The rules would specifically require the ring fencing of retail operations from investment banking activities.

Both the Royal Bank of Scotland and Building Societies Association filed written submissions to the Parliamentary Commission on Banking Standards in protest of the proposed changes. While the Royal Bank of Scotland argued that all banks should be included in the scope of the new regulations, the Building Societies Association argued that the exemption level should be reduced to only £5 – 10 billion in total assets from the currently proposed £25 billion threshold.

Level Playing Field is required for Investment Banking Competition to Thrive

The Building Societies Association sees an opportunity in the new regulations to level what has been historically an unequal playing field. While building societies are regulated by separate legislation that restricts their activities in investment banking, they are currently competing for some financing arrangements with institutions that don’t face the same restrictions.

Adrian Coles, the Director-General of the association told the Financial Times, “our fear is that building societies, which are constrained by their own legislation, will be competing with a group of smaller banks of a similar size which are not constrained at all.”

While introducing additional competition will be a positive development for those seeking financing, it’s not clear whether the parliamentary commission studying the matter will be interested in adopting competitive market concerns into their proposed regulations.

New Requirements are Critical for the Stability of All Institutions

The Royal Bank of Scotland takes a different view of the new regulations, arguing that the rules should apply to all financial institutions that have both retail and investment banks. In essence, the rules are being implemented to ensure that retail deposits and activities are protected from riskier investment banking operations. Arguably, this protection is primarily for the benefit of the taxpaying public, as they are the group likely on the hook if a smaller institution failed due to excessive risk taking.

While the rules were principally designed to protect from large scale banking defaults, RBS makes a valid point that Northern Rock, a bank at the core of the financial crisis, would actually have been exempt from the proposed ring fencing rules.

Expansion of Regulation not Limited to the United Kingdom

Whether the parliamentary commission decides to proceed with their proposed legislation as is, or adopt the suggestions of the Society or the Royal Bank of Scotland, the new regulations do pose yet another regulatory hurdle upon financial institutions in the United Kingdom. And these types of restrictions are certainly not only being proposed in the British Isles; many countries have similar regulations already in place, or they are currently exploring the subject. This reflects the new, more highly regulated and monitored reality that investment banks will struggle to operate in.

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In what is widely being reported as the most expensive election in U.S. history, with a total of $6 billion being spent over the campaign, Wall Street is among the biggest losers when the election results were announced on November 6th.  After widely endorsing Barack Obama in the 2008 Presidential election, the industry turned to support one of its own, former Bain Capital partner Mitt Romney. After heaping nearly $61 million on Romney’s campaign (the financial services industry donated only $18.7 million to Barack Obama according to Forbes), Wall Street firms donated an additional $94 million to Super Political Action Campaigns (PACs), mostly aligned with Romney.

Employees of Goldman Sachs were among the most generous, donating $900,000 to Romney’s campaign and just $136,000 to Obama. This is perhaps one of the most surprising examples as Goldman had been a traditional supporter of Democrat candidates. Whether investment bankers were concerned about Obama’s policies or wanted to support someone from the Street, their money certainly was behind the Republican candidate.

Wall Street’s Partisanship Was No Surprise in this Election

There should be no real surprise to the partisanship seen on Wall Street during this past election. While the merits of Obama’s actions can certainly be debated politically, there is no doubt that regulation and oversight has dramatically increased on Wall Street since the financial crisis. Many investment bankers viewed Romney as someone with direct experience in the financial industry, and would know what regulations are appropriate and what regulations would simply be an obstruction to investment managers. Whether a Romney administration would have actually meant significantly less regulation is unclear, but the perception on Wall Street can certainly be measured by campaign contributions.

Dodd-Frank was Major Concern of Investment Bankers

One of the key issues facing investment bankers was the imposition of the Dodd-Frank financial reform law. The Act created a number of new federal agencies and related regulations designed to promote financial institution transparency while increasing oversight of systemic risk and speculative trading by financial institutions.

Mitt Romney had proposed to repeal Dodd-Frank, which would have been a welcome gift to investment bankers. However, he did also indicate that he anticipated a role for some greater federal oversight of financial institutions. But how different Romney’s plan was from Dodd-Frank, we’ll never know.

What Do the Election Results Mean for Investment Banking Job Seekers?

The reality is that most of the opportunities in the investment banking sector come from the underlying strength of the global economy. Whether Romney or Obama would have sparked more economic growth in the United States with their respective policies is a matter of political debate. At the margins, relaxing regulations such as Dodd-Frank would like be of some benefit to investment banks and therefore current and prospective employees.

But as the world’s economy becomes more globalized, the role that America alone plays in determining the strength of the investment banking sector has declined somewhat. Trouble in European economies has forced institutions such as UBS to lay off thousands. With the amount of labor mobility these days, those former UBS employees will be competing for American (as well as European and Asian) investment banking jobs. Those seeking employment in the investment banking space should be equally interested in the geopolitical situations in Europe and Asia as they are in the selection of a American President between two relatively competent men.

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There was further evidence this week of the continued decline in the investment banking industry this week, as rumors surfaced that UBS was going to cut an additional 10,000 employees in coming months. The announcement marks a continuation of a long line of layoffs announcements in the industry as initial public offerings as well as mergers and acquisition dry up. The trend has been present in all major markets, from North America, to Europe, and even to Asian. The latest rumors circling UBS would certainly some of the most aggressive cuts that have been seen to date, as they would total 16 percent of the banks workforce.

UBS has been facing increasing pressures from Swiss regulators to reduce their investment banking operations and focus on more traditional business lines, which is not unlike banks in several European countries. The same Daily Telegraph report that suggested Chief Executive Sergio Ermotti will announce that the bank will formerly announce the shift of investment banking to non-core status in order to reduce risk-weighted assets. The bank has declined comment on the rumors.

Select Institutions Thrive in Strong Bond Markets

While the Swiss institution flounders, two other institutions have seen greater success as a result of a change in focus. While also recently announcing sizeable cuts to its workforce, fixed income trading has become one of the biggest profit drivers for Deutsche Bank. In low interest rate environments, corporations in all major financial markets are looking to issue long term debt securities in order to lock in rates at historical lows. While these transactions don’t offer the same high margins as the prestigious merger and acquisition business, it is a steady source of income for the institutions that have realigned themselves with this segment of the industry.

JP Morgan is the second western economy focused bank benefiting from this shift in the industry, and actually has positioned itself as the leading global debt bookrunner to date in 2012. JP Morgan specifically identified its fixed income business as a leading driver for growth in its second quarter earnings announcement.

What Does this Mean for Investment Banking Job Seekers?

The investment banking industry continues to be a tough road for those looking for employment. Declining merger and acquisition activity has really forced the hand of most major investment banks to cut staff, and very few openings exists at any institution for those in traditional investment banking roles. Pay is declining, due to both regulation and market factors, and many are simply looking to other areas of finance, including corporate positions and private equity type roles.

There does remain a niche opportunity for experienced fixed income origination and trading professionals with several years of experience in select markets. Competition is fierce and often those seeking work on competing for those fighting tooth and nail from within the organization for a transfer. Again, this has negative impacts on pay, but it is a source of opportunity of those with the right connections and experience.

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Investment Banking Layoffs Become More Complex

November 5, 2012

In the past, firing an investment banker was as simple as a closed (or not!) door discussion and an escort out the door. With the advent of the Blackberry, things got a little more complicated, but the process was still rather straight forward, confiscating the phone on the way to the waiting taxi cab. But […]

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