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EDITOR’S TAKE: The new normal

It’s now amply apparent that the current banking downturn isn’t the same as the ones that preceded it in 2001 and 1998. While this has been clear to arch-skeptics like Nouriel Roubini since birth, it’s taken a little longer to sink in to lesser mortals like chief executives of banks.

Kenneth Lewis recently told a conference in North Carolina that, “If someone had told me a year ago that things would be worse in December 2008 than in December 2007, I would have thought that person was half crazy.” Bloomberg says Lewis doesn’t expect a recovery until midway though 2009. Even this may be a little deranged.

As the downturn drags on (and on), unfortunate new realities are emerging: Lloyd Blankfein is not God; the broker dealer model is defunct; hedge funds don’t make money in any market; and the state is set to play a much larger part in the financial services industry in future.

An MD at one US bank says the big fear now among his counterparts is that it’s “all over:” the big bonuses, the big holidays, the big money from stock sales, all gone. This is at odds with our recent survey, which found that only 25% of respondents were being forced to forego luxuries this Christmas, but maybe MDs are feeling it worst.

The real question is whether 2008 is the new normal. Revenues at most big investment banks are set to be down at least 40% this year. Worldwide issuance of bonds and securities fell 77% from over a trillion dollars to $247bn in the third quarter.

Will investment banking as it once was ever come back? Banks appear to be planning for a quieter future. According to Citigroup, the restructuring now underway at Credit Suisse would have left its investment bank with revenues 30% lower than they actually were in the froth of 2006. The upside is that CS would have made $10.9bn instead of zero revenues between January and November 2008.

With governments standing behind banks, leverage a lot lower, and complex structured products defunct, investment banking will certainly make for a more pedestrian career. It may also make for one in which the huge highs and the huge lows that have typified the industry become extraordinary rather than routine.

Comments (13)

  1. Very good article, Sarah, thanks. I like thought provoking questions and statements.

    Rodolphe Mortreuil, MKMC Reply
  2. Sarah, you are so good, i think you probably write better than the BBC’s Robert Perston. Not sure if you get the same comp as him though!!!

  3. some hedge funds make money in any markets….

  4. The sarcasm on this site can actually be quite funny!

  5. Agree with russ. The sarcasm point was directed at the first 2 comments above

  6. The first two comments were entirely sincere. We love Sarah, she is the most insightful person on the planet.

  7. (efinancials appears to be infested by trolls.)

    russ+anon: sarah’s point re hedgefunds was that 90+% of them have been exposed as trading beta not the proclaimed alpha. from an FOF/asset mgr’s POV, HFs as a sector have revealed themselves NOT to be an alternative sector, just a high-beta flavour of the existing ones. likely result: steady diminution of instos’ future appetite for HFs as the bandwagon retraces its steps.

    sarah: i would take issue with one of the quoted soundbites: “the broker dealer model is defunct”. the sharp reduction in in-house capitalised trading implies an increasing pressure to use uncapitalised and out-house (heh) trading.

    you (and euromoney) noted this yourself in another post: “Agency salespeople hot, proprietary traders not”. agency sales is a new name but is still broker dealer model — a rose by any other name etc.

  8. There will be a rationalisation in the suite of Front Office products and a flow on impact to the Middle Office an Ops, but I still think that a recovery of type will initiate in Q1 2010, led by change management. Scalability change will not be top of the list, but compliance and risk management probably will. The industry dynamics have changed – the big players lost – and the small/ medium players will seize this opportunity to grow market share. I see Front Office total comp remaining stagnant for all but the stellar performers and a re-balancing of total comp, with change agents being the amongst the few winners. The MD level will lose out too, they have become eyewateringly expensive. Those organisations that neglect to invest in change will go backwards.

  9. Wizard, you sound like a management consultant.

  10. Wizard – It’e people like you that make me want to kill…..

  11. Well any HF which isn’t doing Alpha ain’t a real HF in my book, like the guy said just a jumped up high yield beta.
    I mean how they get caught up long in this dogsh*t market ?

  12. Damon – no, not a mngt consultant, just looking at indicators like the FSA hiring 200+ people. Surely they are not being hired to reinforce the status quo? Like it or not, the community blames the bankers for kicking off this recession and so does the Government and the Government pays for the FSA. The FSA is growing teeth and frankly they need to act …. so I predict more compliance, risk and stability projects. Trade types and volumes have been rationalised, so the F2B will downsize, where is the suprise in that? You do raise a good point, I think the consultancies have a more flexible onboarding model and may be able to build change teams more rapidly than the banks, so keep an eye on their hiring. Either way, expect to invest more in change come 2010.

    GOGO – I am suprised at your reaction! If you want to kill folks, the Army has plenty of jobs going in Helmand, but perhaps you’re a “keyboard warrior”. Step away from the edge and give the Play Station a break.

  13. I take it that JJ’s comment is also meant sarcastically. Now is not the time to be sycophantic and here is not the place.

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