From the monthly archives:

August 2013

Why is investment banking employment still lagging?

Take a look at the following figure.

Investment Banking, Private Equity, and Hedge Fund Industry Employment Growth, 2004-2013

The figure shows the growth in investment banking jobs in the United States from 2004 to June 2013 on an absolute basis and on a year over year employment growth rate basis for the three major financial industry’s sectors: investment banking, hedge funds, and private equity.

In looking at the employment figures, one might simply see an economic cycle, with all three industries now experiencing positive employment growth following the tough years of 2009 and 2010.

Overall, in looking at just the past two months, investment banking jobs are up about two percent, with hedge fund employment up a little less than two percent and private equity employment growing at a little more than two percent.

It’s hard to tell from the year over year figures that one industry is still under more pressure than the other two.

Now take a look at the following figure.

IB, PE, and HF Employment Growth since 2008

The figure shows the how close the three financial industries are from recovering all the employment that was lost during the past recession.

Interestingly, in April 2013 private equity become the first, and is still the only one of the three, to have more individuals employed than it did in January 2008.  As of June 2013 (the most recently available data), employment in the private equity industry is about one percent above where it stood at the beginning of the recession.

Although the private equity industry has the lead, largely due to fewer employment reductions during the downturn, the lead isn’t secure.  The hedge fund industry, the most volatile of the three, has been gaining ground until recently.  If the recent hiccups in the hedge fund industry turn out to be only hiccups, as is expected, hedge fund industry employment will be in positive territory by Thanksgiving, or at the latest, Christmas.

The hedge fund and private equity industries’ experiences are in contrast to the investment banking industry, which has been under much more pressure to recover what it lost.  As of writing, industry employment is still about 7 percent below where it stood in January 2008.  If the recent employment trends continue, the investment banking industry may be in positive territory by this time next year at the earliest.

What’s causing the laggard performance of the investment banking industry?

Although explanations differ in some of the details, experts generally agree on two of the causes (readers should follow the links for further discussion on each of these issues and explanation of the effects on the investment banking industry’s condition).

The first cause of the laggard performance is impending implementation of Dodd-Frank and related regulations.

The second is upcoming Basel III requirements regarding leverage, capital requirements, and liquidity proposals.

Overall, employment in the investment banking industry continues to lag employment growth in the hedge fund and private equity industries.  Although industry professionals give various detailed reasons behind the lagging performance, most appear to agree that Dodd-Frank and Basel III are major sources of concern in explaining the investment banking industry’s employment situation.

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Is the next Federal Reserve chairman/chairwoman going to be Lawrence Summers, Janet Yellen, or an unknown wildcard? (As a note, “unknown” is a relative word here given that the next Federal Reserve chairman will be well-vetted and generally known to everyone who follows monetary policy closely; the chosen applicant simply might not be known in the political world and therefore “unknown”).  The investment banking world continues to be interested, more so than normal, in the ramifications of this highly politicized decision by the Obama administration. And, no doubt, speculation will continue until the initial name is announced in late September/early October.

On Friday, the Wall Street Journal released an article on the evolving nature of Ms. Yellen’s stance related to regulation.  In her own words, Ms. Yellen has evolved “from a slightly ‘docile’ regional bank regulator into a proponent of hard and clear rules designed to make banks less risky … This experience [of the financial crisis] has strongly inclined [her] toward tougher standards and built-in rules that will kick into effect automatically when things like this [2007 to 2009 financial crisis] happen that make tightening up a less discretionary matter.” Because Dr. Yellen will likely be more difficult to deal with when it comes to regulation, this post briefly reviews the differences between Summers and Yellen on financial regulation.

Ms. Yellen’s executive regulatory experience stems from her time as head of the San Francisco Federal Reserve district from 2004 to 2010, before she took office as the Vice Chair of the Board of Governors.  During this time she had numerous opportunities for herself and her staff to look into the financials of such giants as Countrywide Financial Corporation and Wells Fargo.  Not surprisingly, the executive Ms. Yellen acted more like a banking bureaucrat than a leader in the making.  During her tenure she made what came across as various half-hearted attempts at shoring up what would later become weak balance sheets of member banks.  Her excuse for more talk than action is that she “lacked authority.” Of course, given that hindsight is 20/20, the consensus-building Ms. Yellen now appears more zealous and determined in her desire to stringently regulate banks.

In contrast to Ms. Yellen’s regulate-‘em mindset, Mr. Summers is a well-known advocate for financial deregulation in many areas, including over-the-counter derivatives, the Volker rule, and the 90’s deregulation decisions.  Interestingly, Ms. Yellen was involved in a number of the aforementioned decisions, although most reports indicate a very passive attitude on the subjects.

With implementation of Dodd-Frank largely incomplete, the next Federal Reserve chairman will have considerable influence on impending financial regulation.  The Obama administration and the U.S. Senate should think very carefully about whether they prefer a regulation-filled banking system or whether they want a system that celebrates risk and the benefits stemming therefrom.

The decision matters not only on a domestic front.   On a long-term view, the appointment may affect whether the United States continues as the world’s financial capital or instead moves towards an older, stale financial system.

Overall, Ms. Yellen continues to be a front-runner for the head of the Federal Reserve, with the consequences of such an appointment likely to be a more regulated central bank, which will have long-term consequences on U.S. financial competitiveness.

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Who will be the next Federal Reserve chairman? This is the question economists, financial analysts, and political observers have been speculating about for a couple of months now.

According to numerous reports, the top two in the running for the post are former Treasury Secretary Larry Summers and current Federal Reserve Vice-chairwoman Janet Yellen.  A couple other notable possibilities include former Israeli central bank head Stanley Fischer and former Federal Reserve Vice-chairman Donald Kohn.  The question here is: of the two supposed front-runners, who is most likely to be a “yes-man” to the Obama Administration?

First, let’s consider Larry Summers.  Larry Summers is a well-known independent thinker, having no problem ruffling some feathers to get what he wants.  Dr. Summer’s prickliness certainly brings baggage with it. Some of the issues under which Summers has come under fire include comments about women’s ability in mathematics (interestingly, all Dr. Summers was doing was quoting some empirical research) and the Treasury’s involvement in the financial deregulation decisions during the 1990s.

What about Ms. Yellen?  According to many political observers, insiders generally think an appointment of Ms. Yellen as the next Federal Reserve chairwomen would essentially mean no change in Federal Reserve policy. The main challenge ahead for Dr. Yellen (or Dr. Summers as well if selected, although, as noted, he’s much more difficult to predict) would be the gradual elimination of QE 3 once an unemployment rate of 6.5 percent is achieved, something Bernanke has already alluded to.

Dr. Yellen would also likely be outspoken in her criticism of a fiscal policy that reduces the costs of government (i.e. reducing government spending).  The criticism of congressional Republicans’ desire to reduce the costs of government is nothing new.  Bernanke took shots at reducing the costs of the federal government, mistakenly thinking that short-term displacement costs are worth the long-term economic benefit of a bigger private sector.

In addition to the end of QE 3 and continued criticism of fiscal policy, Dr. Yellen is known as a consensus builder, which, no doubt, means that she is more likely to be a “yes-man” to the administration.

In September, Obama is likely to announce his choice for the next head of the Federal Reserve.  In reviewing past policy decisions and comparing the two personality types, it looks like Ms. Yellen is much more likely to be a conventionalist to the Obama Administration than the independent-minded Larry Summers.  The mere fact that a consensus builder is being considered as a front-runner for the job as head of the Federal Reserve is likely discouraging to those who want a separation between politics and monetary policy.

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What do Investment Bankers Think of Janet Yellen?

August 5, 2013

In the past month, a number of articles have focused on Janet Yellen, supposedly the frontrunner for Ben Bernanke’s job as Chairman of the Federal Reserve when he retires at the end of this year . The question here is: what do the people closest to the Federal Reserve – investment bankers – think of Janet Yellen […]

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