The time for the small numbers is over. No more 10%s or 20%s: we're suddenly in a new realm where 3 out 5 colleagues disappear and take home pay could be halved.
The bad news about UBS first appeared in the Financial Times on Friday evening. The bank wants to cut 10,000 jobs, said the FT. The fixed income business will be most affected, it claimed. All elements of the fixed income trading business will be moved into a non-core unit and wound down. All that remains of UBS's investment bank in future will be: equities trading, FX, and the advisory (M&A and capital markets) businesses.
UBS isn't commenting on the FT's "speculation", but further details have emerged over the weekend. The Wall Street Journal said the cuts will mostly affect the investment bank. The investment bank had 16,432 employees at the end of June, suggesting that 60% of its staff are at risk of being removed. The implications is that far more than just UBS's fixed income bankers are in danger of losing their jobs.
The FT says UBS's cuts will take place over the next three years and are part of a restructuring programme devised by Sergio Ermotti called 'Accelerate.' It predicts London, Zurich and Stamford will bear the brunt of the blows; UBS employs 6,500 people in the City of London. Could half these people go? The Wall Street Journal says the cuts will take 3-5 years and that front and back office investment banking positions will be affected, but there will be no front line job losses in wealth management.
The worst thing about UBS's move? It shows that banking analysts are right: after a period of sitting on their hands, banks are now making big, difficult choices and pulling out of entire businesses. In June this year, Dirk Hoffman Becking predicted that some banks would eventually opt for a gradual withdrawal from fixed income currencies and commodities (FICC) businesses - pointing out that this would be harder to orchestrate than a withdrawal from equities due to the long maturity of some fixed income derivative positions.
UBS is the first to follow Hoffman Becking's advice. The Swiss bank is going back to its roots, "becoming an equity house with a strong equity capital markets franchise,” says analyst Kian Abouhossein at JPMorgan. The trouble is that UBS wasn't a 'flow monster.' It was just a 'strategic tourist' in fixed income, which was rebuilt by Carsten Kengeter after 2008 and only achieved a 3.9% market share in the first half of this year according to JPMorgan. As the Financial Times points out, this raises questions over the sustainability of other recent package tours into the fixed income sales and trading business: Morgan Stanley's market share is only 4.4%, Credit Suisse's is only 5.1%. And what about BNP Paribas and SocGen - both of which have pushed into fixed income sales and trading in recent years?
Various questions remain unanswered at UBS. How does the bank plan to retain fixed income staff as they wind down its positions? Maybe this won't be a problem - London headhunters tell us no one else is hiring. And what happens to bonuses this year? Will UBS do anything to tie in its equities staff?
UBS should tie senior staff in. Kweku Adoboli's trial has been overshadowed by news of the restructuring, but last week Kweku sought to blame UBS for placing too much responsibility on him as a junior banker. "Between John and myself we had 30 months’ experience and we were in charge of a $50 billion book,” Kweku said. “Our book is massive. A tiny mistake leads to a huge loss and we were these two kids trying to figure out how to make it work.”
As it enters a period of substantial upheaval, UBS needs to ensure it keeps senior staff in place. It can't afford to rely on juniors to wind down its fixed income books. Closure may be costly.
Meanwhile, the Telegraph reported that senior bankers at Barclays are having their salaries cut by 30%-40%. Some of them are even having their salaries halved. Senior bankers are defined as those on base salaries of £500k-£3m. In other words, Barclays is said to be cutting salaries for board members and MDs.
The danger is that there will be a trickle down effect. If an MD's salary is cut by 40%, surely vice president salaries should be cut too? Headhunters in London have long told us that Barclays made provisions - like Goldman Sachs - to increase its salaries on a temporary basis only, alleging that the salary increases in 2009 at Barclays weren't pensionable and could easily be rolled back. The bank appears to have chosen to do so.
Other banks may well follow. With up to 10,000 UBS investment bankers dribbling onto the market and looking for work, anyone still in employment will not be in any position to dispute a pay cut. There are already signs that employees at other banks are clubbing together and agreeing voluntary salary reductions in the interest of self-preservation. Investec bankers are said to have agreed a 15% reduction in their base salaries, for example. That's very noble, but it may not be enough: in the new world 40%-45% is more like it.