Companies will always need investment banking advice, but the biggest question looming over the business is this: Whether investment banking advice will be as profitable for its practitioners in the future as it has been in the past.
Investment banks are intermediaries between corporations or private equity firms and the capital markets where stocks, bonds, commodities and derivatives are sold. Investment banking has always been a volatile industry with undependable revenues as banks competed for multimillion-dollar fees on a range of businesses ranging from the sales and trading of stocks and bonds, to capital raising, to merger advice, to restructuring and bankruptcy plans. Over the years, investment banks have shed their costumes and the mahogany-lined boardrooms housing secret partner meetings resulting in tailored, bespoke advice determining the fate of America’s major corporations.
When Goldman Sachs Group Inc. went public in 1999, it joined Morgan Stanley, Lehman Brothers, Merrill Lynch & Co. Inc. and Bear Stearns and marked the official beginning of an era of publicly traded investment banks that could no longer take risks -- and collect profits -- for themselves, but instead had to serve a new group of public and institutional shareholders.
Today, many investment banks are now as corporate, open, global and analytical as any other business. This institutionalization has forced many banks to publicly justify their decisions -- as Bank of America Corp. had to justify $25 billion in bonuses to Merrill Lynch bankers -- and left many bankers ambivalent about responding to the clamor of outside voices including shareholders and lawmakers that are now dictating the terms of a business once dominated by highly sophisticated insiders.
The tensions between shareholders, regulators and bank management has only grown as many banks are contending with what many call a “perfect storm” of markets weakness and hundreds of billions of dollars in federal bailout investments, government subsidies, forced bank mergers and new regulations. Most recently, many bankers have been fighting back the feelings of personal animus caused when the Obama administration and Congress questioned the industry’s multimillion-dollar bonus incentives. Those big bonuses were relics of an era when investment banks were privately owned and the profits were split only among the partners, but they became harder to justify to shareholders during the downturn as they took up to about 50% of the average investment bank’s profits.
In addition, the regulatory landscape is changing rapidly for investment banks. In the past, they had to consult with a clutch of regulators including the Securities and Exchange Commission and the Commodity Futures Trading Commission as well as self-regulatory organizations like the Financial Industry Regulatory Authority. During the credit crisis, however, investment banks became heavily dependent on the Federal Reserve, which essentially became the financing and enforcement arm of the U.S. Treasury. Because Lehman Brothers, Bear Stearns and Merrill Lynch are now part of commercial banks, they may also hear whispers of regulatory concerns from the Office of the Comptroller of the Currency or other bank regulators.
The future of investment banking is murky on two sides: From the top, as federal regulators reach down and exert their influence on more of the business; and from the bottom as investment bankers question whether they are willing to work the same 80- or 100-hour weeks for reduced bonuses and more government interference. The balance of power within many firms has shifted as banks try to figure out how to be profitable without the same reliance on credit markets and fixed-income profits that they enjoyed before.
WHERE THE ACTION IS
The current downturn is the first that has hit almost every sector and business within investment banking. Equities, fixed-income, mergers and acquisitions, private equity investments, asset management and wealth management are all recording double-digit declines in revenues. Banks are cutting back on staff at all levels, from laying off senior execs to revoking job offers for junior analysts. As a result, most of the movement in investment banking has been through the “exit” door rather than the entrance. Many investment bankers, for instance, are seeking jobs in corporations as chief executives, or in private equity firms.
However, investment banks are known to overreact to market challenges by cutting up to 20% or more of their staffs, and opportunities are likely to arise as soon as market conditions ease.
The key word for job-seekers over the next two to three years is this: “niche.” While big banks stumbled, an opportunity arose for smaller, less capital-intensive firms who focus on mergers and acquisitions advice or bankruptcy and restructuring advice. Such firms include Lazard Ltd., Evercore Partners and Greenhill and Co., who draw most of their revenues these days from a combination of merger and restructuring fees. Other restructuring firms include Houlihan, Lokey, Howard & Zukin Inc..
There are also a number of even smaller boutiques that have been hunting for senior bankers. One, Peter J. Solomon, has become an informal reunion forum for former Lehman Brothers bankers.
Some foreign-owned banks, including Credit Suisse (USA) Inc., Barclays PLC and Deutsche Bank USA, have been able to collect departing bankers from their American rivals.
Many investment banking purists say the ultimate advantage will accrue to the very largest firms that have had the most stability in their businesses, which will draw clients away from firms affected by chaos. In the opinion of some bankers, that will cause Goldman Sachs & Co., J.P. Morgan and Morgan Stanley to sit atop the heap. However, those firms are still contending with government involvement and are holding off on hiring in the short term.
Investment banking career paths often start with hires either after college, into analyst positions, or after business school, into the associate level. In the past, both analysts and associates were paid six-figure salaries; one or two rungs above, at vice president or director level, sometimes salaries came in just under $1 million during the boom times. That made the jobs appealing, despite the torture of 80- to 100-hour weeks.
But investment banks have cut their incoming classes by 30% to 40%, and overall staffing has been cut by 20% or more. Bonuses, too, have fallen by as much as 70% to 80% compared to highs in 2007.
Those who are intent on entering investment banking may find a boom in future years. The recent run of semi-nationalizations and government ownership will lead to a burst of activity in the future as banks are hired to unwind the government’s positions.
Current investment bankers looking for jobs will find open arms in the government. The Securities and Exchange Commission, Federal Bureau of Investigation and U.S. Treasury are looking for people who understand financial statements and complex securities. Right now, they are favoring those who have experience as research analysts, but investment bankers who are willing to take pay cuts can also apply.
GETTING THE JOB
To advance in investment banking, an MBA degree is now essential. Also essential is a wide-ranging knowledge of the credit markets, which will help with one of the most popular businesses right now: bankruptcy and restructuring. Much of that business depends on creative structuring of debt as well as negotiating savvy. But beware: The restructuring business, once entered, is rarely exited. The restructuring world is small and tight-knit, and it is not unusual for bankers in that area to stay within it for most, if not all, of their careers.