Summary:
Sarah Butcher on why extravagant salaries for investment bankers may stay down, even when trade picks up again. Reasons for this are new regulations that are almost certainly on their way (central bank support for brokers will come at a cost); shareholder pressure (from individual investors as well as sovereign wealth funds) and an increasing number of clients disputing the exorbitant fees charged by investment banks. (Published: 10/06/08)
Notes:
- Investment bankers are paid generously because they make big money for their employers
- in 2006 profits per head in investment banking were 26 times higher than in the average industry, according to McKinsey
- profits now on a downwards trajectory
- pay will fall in 2008
- question is when it will bounce back up
- CEBR: big bonuses will be back in 2011
- but: there are signs that a deeper structural shift is taking place
- 3 bad omens:
- Regulation
- Fed support for brokerage houses will come at a cost
- Tim Geithner, president of the Federal Reserve Bank of New York
- quoted in the Financial Times complaining that the Fed’s responsibility for financial stability is unmatched by its authority
- "The gap needs to be closed."
- Regulation will almost certainly involve
- increased capital requirements
- lower leverage,
- possibly limits on overnight repo funding
- higher capital charges against assets held in trading books
- When good times return, banks will therefore be less able to exploit new opportunities.
- Trading profits will be lower as a result.
- Shareholder power
- investment banks have long traded at low multiples due to uncertainty over the source of their success
- clear now that those multiples are justified (profits now ephemeral)
- extravagant pay in boom years is looking increasingly foolish
- Sovereign wealth funds (SWFs)
- could also help suppress frothy bonuses
- will exert an influence behind the scenes
- Brad Hintz: “Sovereign funds are going to go directly to management and ask what’s being done to clean balance sheets, cut expenses and lower headcount.”
- Fee disputes
- Client mutterings about exorbitant advisory fees are turning into full-scale complaints
- e.g. Bradford & Bingley rights issue debacle
- has helped focus minds on whether underwriting fees are justified
- In Asia, where M&A activity is still expanding, a high proportion of companies use their in-house advisors to save cash
- "Investment bankers could soon join their retail banking colleagues in pocketing bonuses that are fractions rather than multiples of salary - and in driving Mondeos rather than Maseratis."
