-(Not Quite) Layoffs (But Considered By Some To Be Just As Bad If Not Worse) ‘08: JPMorgan CHASE, Dealbreaker

With news last week of JPMorgan transferring over a third of its incoming investment banking analyst class to the commercial banking side, there are some extremely panicked, recently graduated seniors running around.

If you have been affected, what do you do? What if you lost your summer internship or full-time job entirely?

Who’s Affected

Some have theorized that JPMorgan and other banks hand-picked people to be transferred based on work experience, GPA, university and other criteria.

I don’t buy into this for a second. Bankers are lazy when it comes to firing people; they like to make it quick and avoid dragging things out.

Reviewing an analyst class of close to 150 to try and match everyone up with the appropriate divisions would be a massive undertaking, and I just don’t think the bankers themselves or even HR (yes, they might occasionally do something) would take the time out to do this.

It’s more likely that the moves were indeed random and that the analysts were “picked out of a hat.” If you’re affected, you could not have done anything to prevent it.

What To Do

I’ve received email from summer interns and incoming analysts who are panicked about what to do. If you get transferred to private wealth management, should you drop out of finance altogether? Go to another bank?

No, you shouldn’t. Instead, be happy you still have a job. With the layoff count now at, oh, 65,000 or so on Wall Street, most people who have been “restructured” lately are now in job hunting mode.

Personally, I’ve seen many friends get laid off in recent months and not a single one of them has found another finance job yet. Some are (gasp) even moving to “industry.”

Instead of dwelling on how you were unfairly transferred, you should instead use the time to network, get to know people throughout the bank and position yourself so that you can move over when the opportunity arises.

Build It Before You Need It

Turnover in finance is higher than almost any other industry (except for maybe law), and you never know when someone’s going to leave unexpectedly.

Banks may not be doing much new hiring right now, but if people leave unexpectedly they will usually try to replace them - and if they can do it internally, all the better.

This is why it pays to stick around and network as much as possible - you never know when an opportunity to move over to investment banking will open up.

Quitting if you get transferred does not make any sense - it won’t be any easier to find something if you’re out of work entirely, and you should instead use the time to build your skills and resume.

If You Get Cut Entirely

If the worst happens and you get cut, either from your internship or full-time position, you’ll have to consider “strategic alternatives.” I would recommend against sitting around for the summer or doing a typical summer job such as retail or life guarding.

Try to find something relevant that hasn’t been affected quite as much by the downturn - although some poke fun at accounting, it’s a critical skill in banking and working at the Big 4 could actually be a decent experience down the road.

Consulting internships and anything else in finance (asset management, private wealth management, etc.) would be similarly useful, and even a sales or marketing job at a normal company could be spun positively on an investment banking resume.

These are more viable for full-timers who have had their offers rescinded; it would be near-impossible to find a summer internship at this late stage.

Rescinded Summer Offers

If you had a summer offer rescinded, there are still options even at this late stage. As I wrote above, do not sit around doing the “typical” jobs that college students do.

Other, better options: study abroad (great for resumes and investment banking interviews and yes, you might be able to apply, even now), volunteer work (either for a nonprofit or literally volunteering to work somewhere for free), or starting something on your own (doesn’t have to be a company, it could be a student group or organization or even a website).

None of these puts you in as good a position as an actual finance internship, but they’re all significantly better than doing the typical summer job.

The Dirty Secrets Of Investment Banking

Part of the reason I started this site was to give an honest view of what working in investment banking at the junior levels is like.

With all the market turmoil recently, there are 2 conclusions that come to mind that no one in HR or at those cheesy recruiting events will tell you:

1) The industry is cyclical.

When times are good, they’re really good. Bonuses reach record highs; banks are fighting each other to recruit people; and people hop from bank to bank seeking the best offer they can get.

There was a great article in Bloomberg awhile back on this very topic. To anyone outside the industry, the hiring practices in finance would seem absurd: hire an excess of people in boom times, pay them an obscene amount of money, and then fire them all when the market gets worse.

As the article suggests, a better solution would be to adjust hiring practices so that banks don’t hire excessively and then adjust salaries and bonuses - rather than headcount - when the market turns.

2) There are no guarantees.

This one is easy to lose sight of when you’re in school, because there is a fairly obvious correlation between effort and success: study and work hard, and you get good grades.

In the real world you may not get what you’re looking for all the time, no matter how hard you try. This is just one of those things you have to learn, and if you’ve been negatively affected by the downturn, you should be fortunate you’re learning this lesson early in life when misfortune is easier to fix.

I don’t want to end on a depressing note, so just keep in mind that the market will come back eventually. And hey, 2008 bonuses might not be that bad.…

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-Bonus Season, The Leveraged Sellout (note: these refer to 2005 bonuses)

So the question of the hour (and all the 1st Year Analysts have been asking me about lately) is what 2008 analyst bonuses will be.

You might have seen the spreadsheet Dealbreaker posted awhile back on expected bonuses (the sources are all either “Staffer,” “Rumor” or blank, so this is obviously reliable information).

Some variant of this spreadsheet floats around every year, and it’s always overly optimistic. Over the past few years, though, bonuses were close to predictable because M&A activity was up each year, investment banking revenue kept rising, and America wasn’t in danger of being sold to China.

No one knows what’s going to happen, but we all like to speculate. And hey, I work in the industry so I must know something more than the average person, right? Right?

How Bonus Numbers Are Actually Determined

Before getting into why I (almost) believe the numbers in the spreadsheet, keep in mind how banks determine bonus numbers: they tie total compensation to a percentage of revenue (usually around 50% of revenue is paid out in compensation) and look at what everyone else on Wall Street is doing to make sure they’re in-line.

The 50% number above refers to total compensation for all employees - so it’s difficult to separate out what % is allocated to Analysts, Associates, and so on vs. what is allocated to senior bankers and even to middle and back-office guys (yeah, they get paid too… if things are going well).

Still, the basic point is simple: if revenue is down 50%, bonuses are unlikely to stay the same (unless everyone else is doing fine and keeps their bonuses the same… then yours might stay the same as well).

The Cold, Hard Numbers

In this bonus debate, very few people have actually relied on numbers to assert their views. So I’m going to change that and look at actual investment banking revenue this year vs. last year, for a mix of bulge bracket and middle-market/boutique firms.

Analyst bonuses are paid based on 6/30 TTM (Trailing Twelve Months for those of you not in finance) numbers, and while 6/30 quarterly figures for banks are not yet out, we can get somewhat of an idea by looking at 3/31/2008 trailing nine-month figures and comparing them to 3/31/2007 numbers.

As I read through the filings for some of these banks I started laughing because declines of over 100% were marked as “NM” (”Not Meaningful” for those not in finance yet). Just for fun, though, I’ve left them in here because it is quite amusing.

(Note to conspiracy theorists: I left UBS off the list not because I work at UBS LA (I don’t really, I swear) but rather because they did something screwy with their Q1 results and I was too tired/lazy to figure it out at 3 AM. Or maybe I was just hallucinating, who knows.)

We could draw a couple conclusions from this: if you’re at Deutsche Bank or Citi, you’re really screwed, for example. Or that if you’re at Lazard, you’re probably laughing at all your bulge bracket buddies right about now.

But my point is simple: investment banking revenue, on a trailing nine-month basis, is not down all that much - a median of 14% decline. Goldman’s trailing nine-month revenue was up, slightly, as were several others. While Citi and DB in particular were hit hard by all the recent troubles, no one dropped to $0 (unless I were to be cruel and add Bear Stearns to the mix - even then it wouldn’t be quite $0).

However, the picture looks considerably bleaker on a year over year basis for the most recent quarter. Even the mighty Goldman is down over 30%, and the median decline is much higher.

If the trend continues (and all indications are that it has), then 6/30 TTM figures will be down by more than what I’ve suggested above.

Still, based on these numbers I find it difficult to believe that bonuses will drop to $10-20K as some have suggested - revenue was simply not down 80%, nor was it even down to 2001-2003 levels.

Psychology vs. Numbers

I was shocked at these findings. When I started writing this post I had titled it, “Why I Don’t Believe The Numbers” - but then I looked at the revenue for all these banks and realized I might be wrong.

Working in the industry, it’s easy to dismiss the notion of bonuses being nearly the same as last year’s as absurd and not spend a second more thinking about it.

Everyone’s getting laid off; no one who has been laid off can find jobs (especially with thousands from Bear Stearns also looking); and everyone is pitching deal rather than doing deals.

While things have definitely taken a turn for the worst in 2008, remember that bonus numbers are based on the second half of 2007 as well - while depressing, it was not quite the bloodbath 2008 has been thus far.

No, It’s Not 2001 - 2003 (Yet), Sorry

Some people out there on message boards and Dealbreaker comments have used the argument that the economy “feels like” 2001-2003, so bonuses should be about what Analysts made back then ($15-$35K for 1st Years apparently).

While I agree that things are headed downhill and the recession may be both painful and long-lasting, I just don’t think we’re there yet - once again, based on the cold, hard numbers.

Let’s take a look at “recession-era” revenue for some of the banks mentioned above. I’m too lazy to go through filings for all these banks, but here are a few examples:

(Before anyone says anything about attention to detail, these numbers are all in millions; yes I was too lazy to add it and just noticed now.)

Witness how even the mighty Goldman Sachs fell from $1.6 billion quarterly investment banking revenue at the height of the boom to a mere $449 million quarterly revenue in the worst of the recession. Given that Goldman reported $1.2 billion investment banking revenue in February 2008, we still have quite a ways to fall before reaching 2002-2003 era bonuses.

These numbers suggest that we’re somewhere around late 2000 of the last recession - in other words, we’re not close to the bottom yet.

Ok, But Give Me A Number

I hesitate to give a specific number because then it’s easy to see if I was right or wrong. But if I had to guess, I’d say that bonuses will be down 20-30% overall. Something in the range of $60-75K for 1st Year Analysts’ top bonus seems reasonable.

“Top” bonuses might be similar to last year’s numbers and there may be a wider spread between top, middle and bottom buckets - that’s a popular theory, but I find it hard to believe anything will stay exactly the same given revenue declines across the board.

There might be more of a difference between individual banks than in past years, but I think this is less likely than the above scenario - people get annoyed if they are paid 30% less than someone at another bank in the same bonus tier.

But I Could Be Wrong…

As a disclaimer, I could be completely wrong here - in either direction. Many of those who lived through the last recession are no longer even in banking so there aren’t a whole lot of well-qualified opinions on this topic (besides my own, of course :).

If 6/30 quarterly figures are worse than expected, bonuses could drop more than I’ve predicted. And since I don’t have a crystal ball, there’s no way to tell what will happen there.

As soon as Analyst bonus numbers become known, I’ll post here and, in the interest of accountability, state if I was right or wrong. My gut feeling is that the Dealbreaker spreadsheet is a bit too optimistic but more believable than bonuses falling to 2001-2003 levels.

But Who Cares, Anyway?

Although people love to speculate on bonuses, this year I think those of us who are still employed should just be lucky we haven’t been laid off (yet). The bonus is a nice reward for all your hard work throughout the year, but you should never do investment banking solely for the bonus.

Or else you might just wake up with a few extra bodies in your bathtub…

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1. Everyone below the VP level at Bear Stearns is getting fired.
2. The investment banking division is going to be absorbed by the Death Star aka JPMorgan.
3. All summer analysts are getting their offers revoked and thrown into the street.
4. The shareholders have rebelled and may veto the deal now, until JPMorgan pays more or until someone else steps up to the plate.

Although it would make life more interesting if any of the above were true, they are all RUMORS and range from possible to unlikely to completely ridiculous (the Death Star one).

The reality is no one knows what’s going on.  Neither the CEOs of the companies, the Fed, nor any of the Managing Directors know what’s going to happen.

Will people be fired?  Yes.  But no one knows how many, who, or when, and anyone else saying otherwise is simply spreading false rumors.

Are the shareholders going to veto the deal?  Maybe, maybe not.

But in any case, do you gain anything by thinking about it 24/7?

No, not really.

Despite my post on Bear Stearns summer offers the other day in which I argued that no one really knows what’s going to happen and where I urged people not to panic, I’ve been getting lots of panicked questions and emails from readers.

So I thought it might be better to give a list of what NOT to do and what to do if you signed on to work at Bear.

What NOT To Do: Call Bear Stearns

Unless you are calling a very low-level contact (e.g. Analyst), this is pointless on a number of levels.

First, do you really think that senior people at Bear are particularly concerned with the fate of incoming college students who haven’t had real jobs before?

Not to sound harsh, but there are people here who have lost their life savings over this incident.  No matter how screwed you think you are, it’s not that bad because you haven’t even started your career yet and you don’t even have a savings to lose.

I was incredulous reading the “tip” posted on Dealbreaker the other day:

“I called the guy I had interviewed with originally this afternoon. He said he was busy, so I agreed to call back after 4:30. At 5 pm, I call, and some other guy picks up and says, “He no longer works here”.”

Even if we pretend for a split-second that this story is actually true, I don’t think anyone reading this site would ever do something like this.  At least, I hope not.

Resist the urge to contact Bear.  They will contact you.

What NOT To Do: Panic And Think Your Life Is Over

Also a bad move.  If you were smart and motivated enough to get a summer internship or full-time offer at Bear and at an investment bank in general, chances are you’re smart enough to find something else if your offer is not honored.

And if you really want to be in finance or investment banking, there numerous ways out of this situation…. going to a boutique, doing consulting, accounting, or something else related and then switching over or going to business school and getting in afterward.

Yes, you will be affected if you had planned to work at Bear, but it’s not the end of the world and you can still have a career in finance.

What NOT To Do: Panic If You’re Working At Lehman Brothers

This one just goes to show how often rumors come true (exactly 5% of the time).  Given Lehman’s earnings announcement the other day, there’s little to no reason to worry if you’re a summer intern or full-time hire there.  The “rumored liquidity problems” haven’t amounted to anything so far.

The same really applies if you’re going to be at any other bank rumored to be in some kind of financial difficulty.  Until something actually happens, don’t assume it will just because you read it on a message board somewhere (blogs, of course, are much more credible sources than message boards ).

What To Do: Explore Strategic Alternatives

You probably should be thinking of alternatives if you were planning on going to Bear, simply because no one knows what is going to happen. With even Goldman Sachs starting to cut back on expenses, you don’t stand too great a chance of getting hired at another bulge bracket unless you have a great connection and can network your way in.

Although I have recommended going to bigger banks for wider exposure, this is one scenario where it would probably be better to target boutiques in your search.

I don’t think this needs to be said, but don’t mention that you have already accepted with Bear when doing this… you’re just a smart, motivated college student looking to get into investment banking.

So there you have it.  Three strategies (if you want to call panicking a strategy) to avoid and one to consider.  I hope this is all I’ll have to write on Bear Stearns, but I have a feeling this saga is far from over.

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With the news on Friday of Bear Stearns’ impending collapse and Sunday’s news of its $2 per share acquisition by JPMorgan, as well as the rumored impending collapses of several other banks (Lehman and Merrill seem to rank highly on those lists), summer interns who have received offers from Bear are stuck between a rock and a hard place.

This Deal Journal article sums up pretty well the predicament that senior bankers from Bear Stearns are in.

But what about those who haven’t even started working there yet? What is going to happen to their offers? Are they still going to have jobs? Will they get offers at JPMorgan? What about full-time hires?

Unfortunately, no one really knows the answers to any of these questions. The best we can do is speculate and make educated guesses.

Lack Of Precedent Transactions

Whether in banking or corporate law, professionals always look at precedent transactions to figure out what to do.

But what happens when there are no precedent transactions?

The two modern cases of banks being acquired by other banks that come to mind are DLJ’s acquisition by Credit Suisse in August 2000 and Smith Barney’s acquisition by Citi in October 1998.

Unfortunately, both of those were nearly 10 years ago and that is an eternity in Wall Street years. Hardly any of the senior bankers from those acquisitions are still around, let alone Analysts or Summer Analysts.

The WSJ Deal Journal has a good list of a few more investment bank acquisitions, but again most of those occurred decades ago, so we don’t have any great benchmarks.

The other issue is that the recruiting process was significantly different “back in the day” and there wasn’t as much emphasis placed on summer internships leading to full-time jobs.

Keep in mind that in the late 90’s, college and MBA grads looking to hit it big were equally likely to go to a pre-IPO startup as they were to go to an investment bank. So in some ways it was actually easier to get banking internships and investment banking jobs because banks had to try harder to get people.

Long story short, there are no good precedent transactions we can use to figure out what will happen here. We have only educated guesses.

Summer Internship Offers

Those with summer internship offers are actually at less risk than those with full-time offers. The last thing on JPMorgan’s mind right now is what to do with summer interns.

Integration on multi-billion dollar mergers will last months, if not years, and when it comes time to cut headcount, the senior bankers will be the first to go.

For a people-intensive business like investment banking, JPMorgan will be reluctant to make huge, sweeping changes to Bear Stearns, such as firing all Analysts and Summer Analysts.

One risk for summer interns is that full-time offers will simply not be awarded at the end of the internship as in previous years.

Or the summer offers could be revoked entirely. At this point, it’s too early to say. But you have to be prepared for the worst case scenario.

Full-Time Offers

Those with full-time Investment Banking Analyst offers are at significantly more risk, simply because they’ll typically last 2-3 years. So JPMorgan will pay more attention to you than it would to summer interns.

However, there isn’t much you can do other than wait and see and start talking to other banks, as painful as that may be.

Traditionally when banks acquire other banks, there’s overlap in client bases, which can cause redundant senior bankers and industry groups to get fired.

It’s unclear how much overlap there is with JPMorgan, but many of the companies it covers are smaller than what JPM focuses on; that said, you can tell from JPMorgan’s presentation on the topic that they are most excited about other parts of the business, like the prime brokerage unit.

It would have been a far better scenario for employees if a European bank with a limited US presence like Barclay’s had purchased Bear, as layoffs in investment banking would be less likely.

What You Should Do

Some readers have asked me if they should start speaking with other banks, renege on their Bear Stearns offers, or do anything similar.

Before doing any of this, do take into account that the market is going to be flooded with full-time Bear Stearns employees looking for jobs now. And while the middle-market is still somewhat active on the M&A front, middle-markets and boutiques do have their limits on how many bankers they will hire.

Needless to say, reneging on your offer without even knowing what’s going to happen or without having another offer is a really bad idea. You want at least some type of backup plan, and doing this would leave you with nothing.

So, what should you do? Perhaps start speaking with boutiques and middle-market firms where you know people. Don’t even try for other bulge brackets unless you have a killer connection that can get you in at this late stage.

I was originally going to recommend a “wait and see” approach, but with the acquisition on Sunday, I’m not sure being passive makes sense.

But I make no guarantees and who knows what will happen next. Without precedent transactions, this is all just an educated guess.

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January was the second full month of operation for Mergers & Inquisitions, and I’m proud to say that visitors and pageviews more than doubled over December levels! I hope you’re continuing to find the site useful. Some of you have sent emails and resume review requests and I will get back to you, it just takes awhile to respond based on my schedule and how much else is going on at the time.

In terms of content, I focused on tips for resumes, internships and getting those investment banking jobs you’ve been after.

Investment Banking Resumes

I wrote 2 articles on resumes - one covering common mistakes in investment banking resumes, and one on how investment bankers read resumes and decide who gets interviews and who doesn’t.

If you want to send me your resume, please make sure to read those 2 articles first as many of your questions will be answered already. If your resume suffers from problems mentioned in those it may take me longer to respond to you as well.

Investment Banking Summer Internship Tips

With recruiting season in full swing, everyone was also very focused on getting investment banking summer internships. To address reader questions, I wrote articles on how the investment banking interview selection process works and on how to improve your offer success rate.

These were both in addition to my already existing guide to getting an investment banking job, published back in November. If you haven’t already read it and want to break into investment banking, be sure to check it out!

Some readers have also asked me about how to do well in their summer internships and improve their chances of getting full-time offers, so I wrote another article about that - How To Dominate Your Investment Banking Summer Internship.

Other Reader Questions And Investment Banking Lifestyle Posts

With all the news of layoffs and the downturn in the economy, some have also asked me if it’s even a good time to get into banking. The short answer: you really have no choice, so do it now anyway. For the longer answer, see my post on signs of a recession in the financial services world.

A couple readers also asked about the “best” groups (despite my insistence that your team matters more than the prestige of your group) and specifically about UBS LA, so I addressed that in a brief post outlining the rise and fall of UBS LA.

Although it was not a commonly asked question, I also looked at a bulge bracket vs. a boutique and went through some of the reasons why I strongly recommend going to the best name you can.

Finally, in another reader Q&A post I covered questions about sales & trading resumes, breaking in from the pharmaceutical industry and the relevance of international experience in China when applying to investment banking jobs.

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-”Top Firm Appoints ‘Expense Czar’ ”

Reading this story about Citi appointing an “expense czar,” I was reminded of one of most frequently asked questions (I should really start a FAQ section…) - “Are we going into a recession? Should I even bother getting into banking right now if the market is going to be terrible?”

Make no mistake, things are getting worse. I don’t know if I’d say they’re quite “bad” yet except for maybe Citi or Merrill, both of which appear to be auctioning themselves off even more to Middle Eastern investors (China looks like it may be reconsidering its investments).

Signs Of Impending Collapse In Investment Banks

The foreign investor headlines are the ones that make the news, but when the receipt for that $35 dinner you expensed gets rejected, you really know things are getting bad.

Tighten Your Belt

Tightening of expenses is just one way to know when things go bad. When your bank is making a killing and bringing in millions of dollars an hour on deals, no one really cares that you went over the $30 limit on dinner by a few dollars. Or that you counted multiple people multiple times to justify spending $500 on dinner for yourself that one night (models and bottles, models and bottles).

But when business slows down, people respond by cutting costs. In a bad market environment it’s almost impossible to win new business, so the only way to maintain profits is through expense reduction. Saving $500 when you’re losing $25 billion all those writedowns seems irrational, but hey, every little bit helps, right?

Legend has it that back in 2002-2003 analysts could only expense $15 for dinner each night. Can you imagine that? That’s when things get really bad. The day our $30 is reduced to $15 is the day I quit.

Fire All Those People Too

Beyond stricter expensing policies, there are other signs that business is slowing down. One is the lack of recruiting or reduction in the number of new analysts set to be hired. Friends interviewing at banks this past fall said they were turned down because many banks had “filled their quota via summer interns who had accepted offers.”

You’d never fill a quota via with investment banking summer interns alone when business is good; this is simply unheard of. But when all your deals dry up and the senior people are applying for jobs at Lazard or Goldman, there’s no need to recruit new people to plow through PowerPoint or Excel.

So Should I Still Become An Investment Banker?

The short answer is yes. If you want to get into finance and are still an undergraduate, or even if you’re already working in another industry, you have few options aside from investment banking. It’s the standard entry point into finance. Of course, in bad times it will be more difficult to break in and those investment banking salaries will be down, but what else are you going to do? Take a long vacation?

The longer answer is that it’s difficult to time any market, whether it’s the stock market or the job market. If you think a stock is fundamentally a good buy, you should buy it and build up your position over time. Similarly, if you really want to enter a particular field, you should do so as soon as possible and add to your knowledge and experience over time.

Who knows? The market could recover more quickly than expected. Or it could stay be bad. In either case, though, you gain nothing by remaining on the sidelines.  Perfect your investment banking resume, ace your superday interviews, and you’ll find a job.

How To Get In When Firms Are Appointing Expense Czars

Can you still get investment banking jobs now even when things have gone bad? Yes, but it will be more difficult than the previous few years when banks went on hiring sprees. Your best bet is to think smaller, spread your net wide and not aim solely for bulge brackets, especially the ones that have had severe problems/earnings misses (and UBS LA may be on the brink of collapse…)

This is especially the case if you haven’t had a previous banking internship, in which case you have a low shot at the top names. As I mentioned above, many of these banks now fill their full-time investment banking analyst classes almost entirely with summer interns.

Even more so than usual, your chances of getting in will depend on networking with alumni and any other industry connections you have. Even if you don’t up exactly where you want, you can always transition over later after you have a year or more of experience and hiring picks up again.

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