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Prop traders are OUT. Retail bankers are IN

One thing is becoming amply clear: if Goldman and Morgan Stanley want to go into retail banking they’ll have to reduce leverage big time. And reducing leverage will mean less of several things: prop trading, principal investing and leveraged lending.

Deal Journal points out that the respective leverage ratios of Morgan Stanley and Goldman are 34 and 17. Commercial banks usually have ratios something in the region of 15.

Gillian Tett at the FT says de-leveraging of this magnitude could spark $6 trillion of asset sales. Capital available for speculation and lending will inevitably have to fall at the same time.

Goldman has already been reducing leveraged finance jobs and there may now be more cuts to come. But the biggest impact is likely to be felt in areas like Goldman’s prop trading desk, staffed by the most masterful of the masters of the universe.

The most obvious option for the prop trading MoUs is to take a trip over to a hedge fund, the only problem being that they’re not doing particularly well, either, with only 10% above the high water mark at which they can charge performance-related fees from which bonuses are paid.

Retail bankers all the rage

While the prop trader’s star is sinking, the retail banker’s star seems to be rising. Although it seems more likely that GS and MS will buy up deposits or retail institutions than set anything up from scratch, both banks lack the expertise to deal with deposit taking and all that entails.

Jamie Risso Gill, head of the retail banking search practice at Sheffield Haworth, points out that running a retail bank with a branch network is highly manpower-intensive: “As a start, they’d need a salesforce, directors of the branch network, someone responsible for mortgages, someone responsible for retail banking, and someone responsible for credit cards.”

Comments (9)

  1. yes, but the difference in salaries is so huge in both industries. do you think a MoU will work for 40/ year? It will be no replacement in spending power anyway. The city of London will all suffer when/if these very high paying jobs vanish. The MoUs will go on I say and hope.

  2. I don’t think anyone’s suggesting MoUs will go off and become bank cashiers. They’re more likely to pop up in the provinces running gastro pubs.

  3. “Retail bankers all the rage”

    Hahahahaha. Hahahaha. Hahaha. Ha.

    The epitome of inferiority. Handling checking accounts, transfer balances, managing rubbish people, barely any on 6 figures.

    Sure GS/MS will have to lose some of their prop traders, who’ll just go off to a hedge fund without the leverage boundaries of a bank and continue to fly…

  4. Henry…grow up! Without retail banks none of us will be able to spend our salaries…no debit cards, ATMs, etc. Investment bankers do have plenty of cash however, they can’t keep it up for long and many have health problems as a result of being chained to the office desk for hours on end.

    Haahahahaha. Hahaha, Haha. Ha

  5. City will not suffer if these jobs vanish. It is suffering because of these jobs. City existed and prospered long before the latest credit bubble.

  6. Henry, I moved from MoU to a retail bank; you’d be surprised at how complex a retail banking organisation is. It’s not “stack ’em high and sell ’em cheap” (as a fellow former MoU has described it), there’s a lot more to it than that.

  7. GS and MS being regulated by the Fed like other retail banks does not necessarily mean that they will highly develop their retail banking capabilities. This is a different expertise, and it is possible that both banks benefit from the borrowing facilities from the Fed without actually offering retail services. They might turn into a new model not experimentated yet by anyone.

  8. Hedge funds are going extinct like investment bank.
    Have seen the number of hedge funds closing shop?

  9. smart henry – what on earth makes you think that investment bank and/or hedge funds go extinct? People will always need someone to look after their money and I would rather think that mutual funds will vanish, crushed between ETFs and investors able to generate alpha. If regulators dont step in.

    On IBs: Dont know whether you’ve ever worked in an IB but a bunch of smart, greedy and focussed guys will ALWAYS manage to do profitable business.

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