10 Questions I Can Answer About the Future of Investment Banking
“What should we put our money in?”
“Is this the end of Wall Street?”
“Which bank is going to fail next?”
“Should I just move to Thailand or become a ski bum?”
The talk of rumor-mongers who obsess over every last development?
Paranoid message board chatter?
Too much refreshing of the Drudge Report each day?
No.
These are all snippets of conversation from 4 friends in finance, discussing the world at large this past weekend while “on vacation” (I tried to make them turn off CNBC, but it didn’t work).
So if you’re asking the same questions, don’t feel ignorant - not even the insiders have the answers.
But I have been receiving many smaller questions lately - questions I might be able to answer.
1. Is This the End of Investment Banking?
No. Companies always need to raise money, companies are always looking to buy, and companies are always looking to sell. As long as that demand exists, the industry will continue to exist.
It will look different than it does today and than it did a year ago - specifically, there will be fewer big banks and more boutiques - but it will go on.
2. Will Bonuses Ever Return to 2006-2007 Levels?
Not in the near future. They may return after we’ve recovered and hit our next bubble; we’ve already been through junk bonds, tech IPO’s and mortgages, so who knows what’s next.
Bonuses will fall again next year, though they’ll probably remain above 2001-2003 levels (if only slightly).
3. How Will Goldman and Morgan Be Affected?
In case you missed it, Goldman Sachs and Morgan Stanley are both “bank holding companies” now.
All that means is that they’ll become smaller versions of Citi, JP Morgan and Bank of America.
Sure, they’ve been affected by the crisis just as everyone else has been, but I don’t see any drastic changes in store for banking specifically (trading, of course, is entirely different and will be far more regulated).
4. Ok, But What about Goldman and Morgan Bonuses?
Most banks pay Analysts about the same bonuses each year; last year and the year before, the top commercial banks paid around the same as the top standalone investment banks.
Bonuses at Goldman and Morgan will be down, as will bonuses everywhere else - not because they’re now “bank holding companies,” but because the economy is far worse than it was last year.
5. What About the Middle Market and Boutique Firms?
These are actually 2 different questions, but in general there will be more small, advisory-focused boutiques as talent leaves the largest firms.
Middle-market banks with little exposure to the crisis may survive, but I foresee some consolidation even in that market.
6. What About Bank of America and Merrill? (And Citi / Wachovia and…)?
Needless to say, people are going to lose their jobs. It’s hard to say how many specifically in investment banking will go, but you can bet they’re not going to keep everyone.
However, the (somewhat) good news for you is that other areas will probably be hit harder than banking.
7. What Are My Chances of Getting In…?
Lower than they were before, regardless of your stats or previous experience. If you want to improve them, take a look at my previous writing on recruiting in a tough market.
Or maybe just take a year off and become a ski bum.
8. Is There Anything in Finance that’s “Safe” Right Now?
First off, in life there’s rarely anything that’s “safe.” So the notion of “job security” in any field is a farce, and in finance it’s even more of a joke - even when times are good.
Banks? Forget about it. Hedge funds? Plenty of them have blown up as well, though you don’t hear about it as much because most are not well-known to the public. Insurance companies? Nope.
One area that is safer is private equity. Sure, they may not be doing a lot of deals lately, but they’re not going to go bankrupt when everyone withdraws their deposits, either. Once they have their assets under management, the capital is theirs to manage.
9. How Bad Will It Get?
Who knows. Back when Bear Stearns failed, we thought that was bad - now it looks like a minor hiccup.
However, given that there are no major, independent investment banks left, I don’t think it can get too much worse.
Sure, companies invested heavily in mortgage-backed securities will continue to fail, and we could have another few WaMu-style disasters, but I would be astonished if, say, Bank of America had to be bailed out.
Side note: I would not keep more than $100,000 in any bank right now, because you just never know… not to be depressing or anything.
10. What Can I Do to Get In?
What I’ve been telling you to do all along:
Go small, go East (whether Far East or Middle East) and go outside pure banking positions.
Sure, things are pretty bleak currently, but I know that firms both large and small are still hiring.
How?
Because I’ve spoken with many mock interview clients recently who have been interviewing at these places.
Adapt - don’t give up.
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Tags: boutique investment banks, finance industry, Goldman Sachs, investment banking, middle-market, Morgan Stanley, understanding investment banking
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This is a great time if you can get into banking….this guy here has the services that will make you able to lock in a job and if you can ride the wave you will come out on top when the economy flips…
Like he said adapt and be flexible…there are still a ton of opportunities out there…you just have to be the best and the most prepared…
[...] & Inquisitions answers 10 questions about the future of investment [...]
Hey Inquisitor:
Can you elaborate on what you mean by “good to be getting in at the bottom”. You mention that in another post.
I can think of the fact that there won’t be many from this year’s vintage in 2-3 years when the market (hopefully) is back up. What impact does this have for analysts that are in for the class of 2009?
I can think of a smaller pool of analysts to go to PE/HF/VC/Corp Dev/Startups as a benefit, but what else? Will there be more opps. for MM Jr. bankers to shoot for Megafunds? What difference does it make if analysts see half as many (if that) deals in their tenure of 2-3 years?
Hope you can elaborate. Thank you!!!
Should be easier for 2009/2010 people to get in if there’s a shortage now. Especially if work picks up, they’ll need to hire more people.
Half as many deals makes little difference at the junior levels, there are diminishing returns (50% of what you learn comes from the first deal, and with each successive deal you learn less).
The main benefit of getting in at the bottom is that you will be at a higher-paid level when the market picks up again. So rather than getting a $90K bonus rather than $50K bonus, you would get a $600K bonus rather than $200K… much bigger difference there.
You mention that PE may be somewhat sheltered from the current market conditions. My (elementary) understanding suggests to me that due to the high cost of debt, PE would really be hurting right now; particularly PE firms that engaged in LBO’s before the market turned last year. If my reasoning is incorrect could you please fill me in as to where I’m off the mark?
Cheers!
It’s true that they aren’t doing deals, but you need to look at how they get paid:
1) They take 2% of their total assets under management for some base salary/bonus payments.
2) Beyond that, any returns on investments over a certain threshold are also used for salary/bonus.
So they won’t be getting much of #2 this year, but if they have $30B under management, that’s still $600MM for base salaries even if they do 0 deals… so there is no need to fire people as there is in banking.
The big IBankers will shrink to a few, with more regulations and the M&A speciality firms will fill the void in a big way.
Is moving from a hf into a the corporate finance department of a large conglomerate advisable?
Will I lose touch of the things going-on in finance?
You’ll probably lose touch of some of what’s going on in the markets - but if you feel more secure by doing so, it’s not a bad move.
You’ll get a better lifestyle but pay will obviously be much less.
The end of investment banks is not the new reality — I agree with your statement in #1. In these changing (and challenging) times, people seeking new attributes in their chosen advisor. If seeking to buy or sell, they are looking for a higher level of service (defind as tailored, not cookie-cutter) and a market approach to their particular situation. This will indeed lead to more success for high touch M&A firms.
Investment banking will not end, but because deleveraging is a long process I suspect that the size of the industry will collapse by around 60%. The reason is simple.. Less money..
In the long term this is a healthy process. Business will go back to running the economy, and bankers will go back to their supporting role rather than leading role.