Thursday, October 4, 2012

Investment Banking Shrinks: Delayed Justice?

The financial "titans" who brought down the world economy seemed immune to any kind of retribution. It appeared as though they would be allowed to continue making money as if nothing had happened. Finally, it seems that they are being reined in by a combination of regulation and good-old-fashioned market dynamics.

An article in The Economist titled, somewhat tongue in cheek, Pity the investment bankers details how the mighty have fallen. It points out that when most industries contract it is a cause for concern, but not in this case.

"When thousands of jobs are lost in investment banks, however, there is barely disguised glee. Instead of offering soothing words and subsidies, politicians promise to crack down even harder on banks and regulators draft new rules to hobble them further or tax them more."

The industry remains the target of regulators:

"Much of the opprobrium is focused on "casino" investment banking. The list of measures to curb the gambling is already long. In Britain banks will have to "ring-fence" their retail-banking businesses to protect them from the failure of their investment banks. In America the Volcker rule aims to stop banks trading for their own profit. More restrictions are coming. In Europe a committee of experts weighing the merits of either a ring-fence or a Volcker rule seems likely to suggest that Brussels should adopt both, in addition to rules limiting bonuses. European officials are pressing for a tax on financial transactions that could cost many more jobs on banks’ trading desks. Efforts to shift much more derivatives trading on to exchanges will also eat into investment-banking margins."

While new regulations have hurt, particularly those addressing capital and liquidity, a major factor has been a lack of business. Fewer people have been knocking on their doors. The decrease in global revenue is indicated in this chart:

"Rules on capital and liquidity known as Basel 3 are already crushing returns, and that in turn is bearing down on both pay and employment."

And how much pain is the industry suffering?

"The financial industry in London, the world’s most international banking hub, will probably have shed 100,000 jobs by the end of this year from its peak of 354,000 in 2007. In New York the industry employs 20,000 fewer people than it did before the crisis, and it is likely to lose 2,600 more jobs this year. Pay is also falling fast—down by about 30% since 2007—and it comes with new strings."

An article by Bloomberg from November, 2011 sheds more light on the job-loss figures in financial services.

"....a wave of firings that has washed away more than 200,000 jobs in the global financial-services industry this year, eclipsing 174,000 in 2009, data compiled by Bloomberg show."

"Banks, insurers and asset managers in Western Europe have been hardest hit, announcing about 105,000 dismissals this year, 66 percent more than the region’s losses in 2008 at the depths of the financial crisis, Bloomberg data show. The 50,000 job cuts in North America this year are more than twice last year’s and fewer than the 175,000 in 2008."

"Almost every week since August has brought news of firings by the world’s biggest banks. HSBC Holdings Plc (HSBA), Europe’s biggest lender, announced that month it would slash 30,000 jobs by the end of 2013. In September, Bank of America Corp. (BAC), the second-largest U.S. lender, said it would cut the same number of jobs. Both banks are trimming about 10 percent of their employees. Last week, BNP Paribas, France’s largest bank, said it will cut about 1,400 jobs at its corporate and investment-banking unit, and UniCredit, Italy’s biggest, said it plans to eliminate 6,150 positions by 2015."

There are indeed wages of sin. It seems likely they will be paid by the innocent and by the smallest of sinners.

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