the_prestige

FT.com / Companies / Financial services - Goldman, Morgan Stanley to become regulated banks

Boy am I glad I'm long gone from this business.

Alexandre

Ditto! IBanking is without a doubt the worst industry I have worked in.

the_prestige

...although it was lucrative while it lasted...

Alexandre

True. I earned more in my three years as an IBanker than my 7 years since graduate school. But the stress, nature of the business and colleagues and hours weren't worth it.

futurenyustudent

No. This is bad. Then all the pricks that used to work in ibanking are going to jump ship to consulting!!!! No consultancy's going to hire me when they have to beat applicants away with sticks!!!

acquadiice

They are going to become regulated banks but im sure they will still have an IBD. I dont understand why people are saying that IB will just disappear? Who will be incharge of all the equity research and m&a deals? IB will be here to stay but the profit margins are the things that are going to be dismal compared to what they use to be...

the_prestige

^^^ errr that's not exactly correct.

Investment banks operate (or at least when they existed) operated under very different rules than deposit banks. The regulations (such as capital adequacy ratios, rules concerning deposits, etc.) are widely different.

Further, banks do not engage in riskier businesses that many i-banks engaged in -- take for instance the huge leveraged bets that Lehman took with regards to the subprime market or other forms of leverage that i-banks routinely took in engaging in other businesses.

Equity Research? Please, this is absolutely a money losing cost center.

And don't fool yourself into thinking that investment banking businesses will continue in its current form... far from it. For instance, one of the traditional profit centers for i-banks were prop trading desks. Those will be largely scaled down or shut down altogether (as was the case when big money center banks took over i-banks such as when Citigroup took over Solly or when Credit Suisse took over First Boston or when BofA takes over Merrill).

The appetite for risk is over in this era. The rules won't let them. That's what Goldman and Morgan decided (or more to the point what the market and their respective shareholders decided when they voted with their feet) when they signed on the dotted line. In order to survive, its now all about having enough liquidity and a strong balance sheet to weather the storm. Cash is King... As Gordon Gekko said, ""The key is capital reserves; without it you can't pi$$ in the tall weeds with the big dogs"

The game is over... for now anyway. When this current storm passes and the dust has settled and the public furor over what will be a huge financial and political football that is this current bailout has passed (i.e. a decade + from now) perhaps when the pendulum has swung the other way the investment banking industry may make a come back... but I wouldn't bet on it.

Alexandre

Excellent response the_prestige. I could not have worded it better myself. "The appetite fot risk" are the key words in your post. IBanks function very differently in that regard. The lower the risk, the lower the returns...the smaller the bonuses. IBanking as a function will remain, but the rules have, in my opinion, been altered for the long term. As the_prestige points out, this could change in the future, but not anytime soon. The US Government is thinking of spending close to a TRILLION (that's 12 zeros folks) to bail out those IBanks. That's on top of the $300 billion bail out of AIG, Freddie Mac and Fannie Mae. The restructuring of the Financial industry is most likely irrevocable.

runningncircles1

The funny thing is, I was going to get an Economics degree and try to put my foot in the door in IB. I decided ECE degree would be better, as I enjoyed the subject matter, anyhow. Thought to myself if I wanted to do IB, they like hiring engineers. God, am I glad I decided not to go down the straight Econ>IB path!

the_prestige

Alex, I think you hit upon a crucial point -- that is, the reason that i-banks were able to recruit the best and the brightest talent (and more to the point retain them) was a simple matter of "show me the money".

That equation doesn't compute anymore. No risk, no reward. And that is where we are. So, yeah, if you have always had a burning desire to run spreadsheets into the wee hours of the night on some mega merger, that work will, of course, still exist... but don't expect i-banking pay to punch above other industries the way that it did in the past. And if the money isn't there, and the "prestige" is waning, then why do it in the first place? Isn't it far better to do something that you really want to do? This is another unintended consequence of the current circumstances. As i-banks lose talent, it will after a period become just another hum-ho industry. I (and Sakky to a certain extent) have been arguing that this trend was taking place far before this crisis started anyways, this only accelerates this trend.

When the all of the dominoes have fallen, the financial industry will look far, far different than it did before this crisis started. It's anyone's guess what it will look like, but one thing is for sure, the days of fat i-banking bonuses and executive perks are over.

Alexandre

Perhaps it is for the best the_prestige. That may actually attract a better breed of IBankers. One less concerned with making money and more interested in the actual work.

TcherryPie

erhmmm, these couple of days have been disastrous for my future.

Going into Junior year (this yr), I had it all planned out.. Continuing with high GPA, ace SAT, continue in EC's and apply to NYU Stern ED. Hopefully attain an IB job shortly thereafter.

now it is time to rethink, but definitely want to stay in the realm of finance.

the_prestige

Well, I'm not so sure about that. It really depends on your perspective. The one thing about the industry (pre-crisis) was that strictly from a technical / ability / "brainpower" perspective, it's hard to deny that the industry attracted the best and brightest minds.

But as we all know some things just go hand in hand -- e.g. money and greed (i.e. the fact that the industry has always attracted more than its fair share of arrogant, superficial, greedy folks was always something that just "came with the territory) -- but let's put that part of the equation aside for a moment -- let's say you are a CEO or CFO and you want the best advice possible whether its a capital raising exercise or an acquisition, etc... do you really care whether the banker across the table goes home and lights his Cuban cigars with crisp $100 bills? Would you rather have a "nicer" guy who might not be as sharp but charges you a lower fee -- "he's just happy to do the work"?

Call me a pessimist but I don't think there are that many folks out there that had a deep love of the work regardless of the pay. I mean let's say we lived in a society where no matter what you did, everyone got paid the same amount of money... how many corporate lawyers and investment bankers would be left? I think we might truly find out what that number might look like over the coming years.

Alexandre

I agree. Money obviously helped attract the talent. With the promise of huge bonuses now in jeopardy, we can assume that many very talented individuals who were once sold in IBanking will now seek other career paths. But we should also consider that there is a very good likelyhood that IBanks will have to recruit far fewer people in the coming years, so even if the supply of talent for IBanking jobs declines, so will the demand from IBanks for new recruits. I don't think IBanks will have to lower their standards, and, given the likely drop in applicants and openings, they will be able to screen their candidates far better for fit and for ethical behavior and team-playing attitudes.

Erik07

good riddance...maybe they can do something useful in their lives now besides making money off money