Why so serious?

I suspect that for some time now, I've been a voice of caution on this board. The reason for that was simple: I have the benefit of having experienced a number of traumatic downdrafts in this business, and I am privy to much information about the institutional outlook of my firm, among others. Most bankers are not.

The last few months have been highly traumatic for the industry, which is one of the reasons I have not been active here. With all due respect to this board and how much I enjoy being helpful here, frankly I've had bigger fish to fry.

I have been meaning, however, to chime in at least once about the gloom and doom that persists not only here but in the halls of most investment banks as well. And given that I've been a persistent voice of caution, you might be surprised to hear that I don't think it's all that bad (presuming of course that we can hang in there for another six months through the end of the next bonus cycle).

Why not? Well, look for the "ground truth", rather than what it looks like it in the press or from 40,000 feet. We've seen a terrible amount of dislocation: Lehman and Bear gone, Merrill and BofA about to heavily rationalize, layoffs almost everywhere else.

But has the market for core investment banking activities really contracted long term? There's very little evidence to support that notion. What has blown up banks to date has been the inability to fully syndicate their inventory, coupled with the hedge fund-like activities upon which their leverage levels were predicated. Clearly, these changes mean bad things for long term bank ROI, since they will no longer be able to act as pseudo hedge funds.

I said in another thread that I have never been inclined to worship at the altar of Goldman or Morgan Stanley (which is not to say I do not, or have not, worked there). Simply that things change very fast in this business. Lehman and Bear have underscored that point well. Goldman has benefitted from what I characterized as one very good trade, but the events of the last month clearly demonstrate the fragility of that win. It very well might have gone the other way.

I have also been on the record as saying that I was perplexed by the general dislike of the universal banking model which I read often - a view I could not disagree with more forcefully. For all the bashing that Citi took (and takes), it is an inconceivably better and more powerful investment banking platform than Salomon or Smith Barney ever were. Likewise JPM. A year ago I would have pointed out that while Goldman and Morgan continued to be premier two-product firms (advisory and equity), nobody but Citi and JPM sat at the top of every league table. If you look at who made progress from the day I started as a first-year analyst to the day I made MD, you would clearly say that if you ran a bank, you'd have wanted to do what Citi and JPM had done.

But back to my view on the future of investment banking...

Take away the hedge fund activities of the investment banks, and you might conclude that the capital raising and advisory services that formed the base of what we generally refer to as "investment banking" haven't changed, at least as far as I can see. Companies still need money, and they're still inclined to pay for M&A advice. Debt markets will be less accomodating, but that means that the business will pivot back towards more of a normalized equity/debt balance. It doesn't mitigate a company's need for finance or acquisitions.

So that leads to an interesting observation: the developments of the last year are incredibly bad for investment banks (and their ROI prospects)... but perhaps a positive thing for investment bankING, given the exit of a number of unreplaced competitors and the return of more rational capital markets. The major caveat for investment bankERS is that the reduction in the number of employers may, at least temporarily, have a meaningful downward impact on compensation pressures.

Back to my point about ground truth. Many people remember the 80s fondly as a golden era of investment banking. But the 90s were incredibly more lucrative for banks and bankers, and this decade even more so (recent history excepted). If you adjust for inflation, bankers today are paid a multiple of what they made in the 80s, and far more than what they made when I entered the business. That's ground truth.

If the business were being disintermediated by the proliferation of information services and the globalization of knowledge and capabilities, does that outcome make sense to you? Or is there another factor at work, one that has more than offset the impact of information proliferation, etc.? Clearly, I have an opinion on that. For those of you just starting your careers, it might be a good thing to think that one through yourself.

-GK