Masters of the Universe crash back to Earth

PUBLISHED : Sunday, 21 September, 2008, 12:00am
UPDATED : Sunday, 21 September, 2008, 12:00am

Investment bankers have long been celebrated as the rulers of the financial world, but last week's stunning shakeup on Wall Street suggested their reign may have come to a sudden end.

Already smarting from the downfall of Bear Stearns, the investment banking industry took a direct hit when two more members of the 'Big Five' on Wall Street fell over - Lehman Brothers going into bankruptcy and Merrill Lynch losing its independence.

'Everyone thinks investment bankers are all arrogant, rich and that they throw their money around, so no one is going to care if we get fired or not,' said one local banker, who, along with the other bankers quoted here, did not wish to be named.

And while the banking forces at Lehman and Merrill may be the ones in limbo at the moment, speculation is rife that the deteriorating market may force job cuts across the entire industry.

'It has moved from bonus talk to just hoping to keep your job,' said one fixed-income banker. 'But I've always lived frugally and not gotten into all that flashy stuff, so I'll do ok.'

Despite speculation about the future, most investment bankers have continued to man their stations.

'We've all said to each other 'let's just keep getting the work done', and that's what we're doing,' said another banker.

But a can-do attitude may not be enough to stem the tide of challenges currently facing the industry. On the one hand, banking revenues have dried up amid a slew of problems in the global economy, while on the other, credit concerns have forced investment banks to do business on tight operating budgets.

Investment banking activity has consequently waned in Hong Kong and other Asian markets so far this year. The amount raised through initial public offerings in the first nine months has tallied just US$17.5 billion, with only 170 issues in Asia - excluding Japan - according to data from news agency Thomson Reuters.

Volumes of share placements and convertible bond sales have also dropped 60 per cent and 53 per cent respectively over the same period.

'This year is a disaster. I got my bonus in April but one-third of it is in bonus shares ... and almost 70 per cent of my beloved investment bank's share price has washed away over the past few days,' said an equity capital markets banker at a major European bank. 'I am still alive and retain a job, but I will have to go through a tough period in the coming two years.'

Given the scale of devastation in the industry, investment bankers who still have a secure hold on their jobs may actually be ahead of the curve.

'Some major players have trimmed their overheads throughout the year, reducing five or seven staff members each time or cutting entertainment and travel subsidies to save costs,' the equity capital markets banker said.

Other banks have imposed recruitment freezes while they wait for the market to show some signs of life.

'Although the market is full of talent, we have to handle the hires in a prudent way,' said a senior executive at a mainland investment bank.

Meanwhile, competition for open positions in the banking houses that are still recruiting must be cut-throat considering an expected inflow of applications from Lehman employees.

Rival banks have already begun talks with Lehman staff about joining their firms.

'We expect to hire as many as 10 bankers from them and are looking particularly at their China team,' said one banker.

Another bank intended to hire a similar number, but was only interested in the cream of the crop.

'It's not going to be in support-type functions [that they hire], but in people who produce deals,' said one observer.

Meanwhile, other banks are also taking a look at Lehman mandates. Morgan Stanley has already replaced Lehman as an adviser on Citic Bank's privatisation of its subsidiary Citic International Finance, according to a statement from Citic.

And with the dust still settling after Lehman's abrupt downfall, even more bankers from Merrill Lynch could hit the street soon looking for jobs, depending on how Bank of America manages its takeover of the firm.

The integration may focus on Merrill's retail brokerage or private wealth-management businesses, rather than simply giving the pure investment banking division a free hand, considering Bank of America has been burned before in the investment banking sector.

But Bank of America may also be reluctant to dismantle Merrill's investment banking division, which has made strong contributions to the firm's income. Merrill's fee income from Asia Pacific ex-Japan surged to US$304 million last year, up from US$85 million five years ago, according to Dealogic. The bank ranked sixth in fee-income league tables last year.

'Merrill Lynch has a serious [investment banking] business and it is making lots of money,' said one senior staff member at Merrill.

Given the uncertainty clouding the industry, some ousted bankers have chosen to leave Wall Street and strike out on their own, setting up their own private equity or boutique brokerage firms.

Established hedge funds and private equity firms may try to pick up some of the remaining bankers. Larger private equity firms, such as Blackstone Group, have been branching out into corporate advisory work and have already pulled bankers away from top-tier investment banks.

Middle Eastern sovereign wealth funds could also add some local bankers as they look to increase their influence in Asia-Pacific and put petro-dollars to work in China and other regional markets.

And some of the more prominent mainland investment banks, such as Bank of China International and China International Corp, may also be in the mix because the opportunity to add experienced workers could help them expand out of the domestic market. Neither of the two banks has run an initial public offering or bond deal in an international market completely on its own.

But given all the market turmoil, some bankers may be reluctant to jump right back into the industry.

'It really forces you to re-evaluate your priorities and perhaps, as a silver lining, explore other avenues to reach in your career,' said one banker who recently completed a stint as an analyst at a top-tier investment bank.

The banker said he had hoped his experience would help him find a job at a large real estate development firm in the US, but he has not been able to find any suitable positions.

'You have to adapt to the current market conditions and put pride and ego aside in order to figure out how you can best adapt to everything,' he said. 'I am, personally, looking at getting involved in volunteer activities.'