In summary have been around the industry for some 8 years. The H2 20 and 21 markets were extraordinary. Many who wanted to leave at D level bid back with MD promo / others promoted given the strength of their product / industry (tech..HC), and going into 2022 the euphoria continued to percolate. The sudden stop, the widening bid / ask spreads and lack of financing bringing M&A to a standstill (tech especially) and of course the primary culprit: uncertainty over a way forward given multiple drivers of inflation and a FED that was clearly late to the game and is speeding through.
In summary, barring the first 3 months post COVID this is the worst period I’ve witnessed for the industry - those around in 2008 will certainly have something to say about that, but this is focused on recent history.
I’d like to invite a comprehensive debate over where we go from here: lay offs, hiring freezes, mitigating circumstances (brain drain in industry for example), would love a debate as I continue to have the debate inside my head and would prefer to speak plainly with those of you who have no agenda. Thoughts?
My 2 cents:
The theory would dictate that central banks across the world would just continue to raise interest rates until financing was so prohibitely high that asset prices would start to fall
Most of us have only ever worked in a context where money was essentially free and where investors would just buy growth at any cost, so long as there was always a keener (stupider?) investor to pump more $$ after them
That is now going to change big time as the market is now risk off big time and will favour companies who can actually generate cash flows to service their debt rather than growth names
Remember that there are entire industry sectors (airlines, cruises) who only survived Covid by taking on more debt and oops now everyone who either didn’t hedge interest rate on floating instruments or who are facing maturity is going to feel the pain big time
In addition, Russia is very likely to turn off some / all of the gas supply to Germany and other European countries as the situation in Ukraine drags on and they want to up the pressure
If you’re a politician what would you favour?
Presumably public services (hospitals etc.) + the darlings of the economy / biggest employers like the auto sector and everyone else will have to reduce their activities / see their operating costs soar
What that means is that states will have to deem which industries get energy and which don’t…
At the micro level, everything which is remotely related to consumer is going to struggle
In addition, very possible you can add another public health issue like monkeypox which would further strain supply issues and bring all import costs higher
So in terms of predictions I would say:
- equities keep falling / SPACs are dead (already the case)
- bankruptcies go up across consumer / retail / airlines and there is consolidation with the better funded players
- banks will start laying off ECM / research first and then whichever M&A group is the least busy (tech)
- Geopolitically: No idea but I think there will be a breaking point where Germany will just cave and given in to Russia so they can get gas supply….
so hopefully no 3rd World War
Putin continues to be de facto president for life….
I’ll take a stab.
These are all just my initial thoughts and I am interested to hear what others think.
PBOC has slashed rates already...maybe not all central banks around the world are raising rates.
Please don't tell me PBOC is not an authentic central bank...
Sure - every country has its own dynamic -
turkey for instance has seen hyperinflation and Erdogan just fires all his finance ministers when they want to raise interest rates so the vicious cycle carries on and their currency is in freefalll
China obviously very different so can’t comment as don’t know the dynamics well enough - curious though how the party will address the prolonged multi lockdown and impact on economy
Do you think Restructuring groups are better off.
Why are you expecting airlines to go bankrupt? I cannot wait to get your answer to laugh (I work in IB and cover airlines)
Don’t need to go very far for that
Airlines are overlevered in the best of times (regardless of ownership model) and take fuel pricing and FX risk head on with limited ability to pass those through
Everytime there’s an exogenous factor eg sept 11, covid etc number of passengers drop and they sit with no revenue and huge costs to maintain fleet / keep slots / pay leases etc
Most recent examples:
Scandinavian airline SAS literally just filed this month
all 3 large latam airlines filed for CH11 - LatAm Airlines, Avianca and AeroMexico
in Asia, AirAsia
etc etc
now of course state owned airlines will typically avoid that fate as too important for the country (eg Air France was beneficiary of a ton of cheap government backed debt but was not nationalised) but not all governments deem their national carrier of critical importance (eg Alitalia in Italy)
always open for a discussion- not sure the “I laugh” is necessary though
When comp went up this much, I brought up the question of sustainability on a few other threads and nobody really answered. I then went back to look at transaction volume, banking fees etc by year. Feels a bit like 2007 in some some respects. Nobody on this forum seems to think banks will reverse comp - I get they won't back on base increases (which there have been multiple) - but they are not in the business of charity either. Maybe someone can help disaggregate inflation vs. just a pure need for bodies in 2021 given spike in volume. Don't need to be a genius to figure out that either bodies come down or bonus % goes down. Easy enough to do the latter. I also reviewed market studies and prior year 2019, 2020 bonus threads (I don't work in IB). I'm not so sure why you guys think banks won't walk back on comp?? That would imply that your position is that it is all inflation related and not labor supply / demand driven - people who wouldn't get interviews in prior years have ended up at good firms. This is a commission based business - all comes down to fees vs. headcount.
I'd encourage you to look at 2007 bonus numbers and then see what happened in 2009-2012 and beyond for comp. This is a good proxy for 2007: https://jenner.com/lehman/docs/LARRY%20WIESENECK/LW%2000893-00927.pdf;&…;
Ultimately, my "guess" is banks will determine their ability to pay vs. headcount needs. The latter, if high, can force them to discount seniors and keep paying juniors if they think volume returns- but don't be under any illusion that they will keep paying 26 year old Associates $500k.
Now the one thing that is hard to ignore, despite inflation and interest rates, is that there is a ton of dry powder in PE land. You don't get paid for sitting on your asses so interesting to see what that does for PE activity - people will have to deploy at some point.
Natural Resources and EM. This won’t be replicated in 2022.
Will there be layoffs in DCM?
I think there could be layoffs/continued movement at the senior level for the bankers who aren’t producing.
My group, and Wall Street in general, hired/poached a ton of upper and mid level senior bankers for what I imagine are very high compensation packages, and with deal volumes down a lot of those bankers probably aren’t producing as much at the banks thought. Idk if there will be layoffs, but compensation packages at this level may go down and cause these bankers to jump ship.
I do think analysts and associates stay relatively protected - they are the lowest cost employees in the pyramid and make up their worth. The juniors in my group are being crushed with work so I’m not worried about anyone being laid off because there isn’t enough to do.
sounds like you may be at leerink, i mean SVB Securities lol
Not the above poster, but I am. Although I love tech and HC, I feel like im at the worst possible shop in terms of market rotation lol. Hopefully this translates into lower hours instead of getting fired.
Comparisons to '07 financial crisis are overblown imo. I do anticipate a recession, in the literal sense that growth slows two quarters in a row, but in the practical sense I don't see it being close in magnitude to the Great Recession. I think people forget that the GR was a historical anomaly and not the standard for economic contractions.
My guess is it takes another 4-8 quarters for inflation to get under control and markets to steady / finish their correction. I think ECM focused franchises will be hit the hardest and wouldn't be surprised to see hiring slow to a near halt and for a few senior bankers to get let go if they aren't paying for themselves in terms of fees.
M&A wise, 2022 hasn't been terrible from what I've seen, it just hasn't continued the manic pace of 2021. You could literally buy ANYTHING in H1 2021 and sell it for more money by EOY. Don't care if we're talking blue-chip stock or JPEG images of a yawning primate.
So all-in-all I think we're in for a mild recession, some of the shittier banks that over-hired during the manic episode of 2021 will have to let some cap markets guys go, and life will resume as normal.
How were layoffs in '07 at the junior level for solvent banks?
I interned in 07 and started work in 08. Throughout segments of finance, not just IB and S&T - layoffs happened at all levels at banks, funds, trading houses and maybe other FIs. For banks in particular, some franchises whether regional or product were shut down by HQ and therefore entire teams were let go. Not saying we are back to 07 / 08, but sharing what I experienced. Could search up old threads and articles from then to get a sense of what could happen in a bad situation.
In case Russia stops gas and slash oil production, we will see GR II
Just started working at a BB. How worried should I be that im going to get laid off?
You should not be worried
Junior analysts are the cheapest employees while doing all the necessary grunt work. Therefore you should not be too worried.
Other things to worry about - like getting dark circles
All of this “junior employees should not be worried” that is coming from junior employees is quite funny.
You’re a VP in ER you’re going to be the first to go my man 😂
Will be good to hear how FIG and FSG performs in down markets, I'd imagine sponsors are gearing up given they're flush with dry powder and valuations have fallen off a cliff
Updated thoughts if any?
bump
Updated thoughts:
Leveraged Finance groups across all big banks are in for a very difficult time
BAML, CS, GS, Barclays, in particular are sitting on billions (yes billions) of paper / actual losses on large underwrites done pre Ukraine on both sides of the ponds incl the Citrix LBO in the US and Morrisons in the UK
They’re all trying to reinvent themselves as now owning the paper they couldn’t sell (TLA are back) and trying to become credit funds as the HYB market is shut and the CLO machine is broken (which means no TLB market)
My guess is that’s the group that will suffer most
After that I thought the predictions in terms of verticals made by @apetrynamakeit seemed to make a lot of sense
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