Crunch time for careers in banking?
Big rewards in upswings – and big job losses in downturns.
The three years leading up to August 2007 were something of a boom for investment banks. Credit Suisse reckons that investment banks increased their global headcount by 30% during that period. And they paid their bankers well. Bonuses in 2006 were a record £12.1bn in the City of London, according to figures from the Office for National Statistics (ONS). But in 2007, they were even better – at a massive £12.6bn.
So where on earth did it all go wrong?
FROM SECURITISATION...
In 2007, storm clouds started swirling around one of investment banks’ big money earners in the boom time: securitisation. What’s securitisation? Simply put, it’s a technique that allows banks to make assets that will generate a future cash flow into saleable ‘securities’.
David Bowie, for example, used securitisation to raise money on his back catalogue – he knew that he’d sell a lot of copies of Space Oddity in the future, but he wanted the cash immediately. He therefore sold ‘Bowie Bonds’ to investors who were given in return a share of the future royalty payments generated by Space Oddity and his other hits.
... to sub-prime
Why is this relevant to banks’ current predicament? Because banks did the same as Bowie, but with US sub-prime mortgages. Traditionally, the risk that a customer wouldn’t be able to repay a mortgage loan rested with the bank that made the loan, and banks were therefore pretty picky about who they extended mortgages to. However, thanks to securitisation, they were able to pass that risk on to investors – or at least they thought they were.
Based on the assumption that struggling US households would be able to continue to make mortgage payments in the future, banks repackaged those mortgages as saleable securities and sold them on to investors. The only problem was the struggling US households couldn’t pay. When this happened, many banks found that the securitised loans that they thought they’d passed on came back to haunt them through clauses that said they’d step in if there was a problem.
Serious signs of pain surfaced in June, when Bear Stearns bailed out two hedge funds exposed to the sub-prime market. By the end of July, the funds had collapsed.
On 9 August, BNP Paribas sparked further panic by suspending three investment funds worth €2bn. It said it could not value the assets in the funds because the market had disappeared.
cometh the crunch
Fearing a big freeze in the credit markets, the European Central Bank, the Federal Reserve and the Bank of Japan then pumped money into the banking system. The
so-called credit crunch had begun. Thanks to the crunch, banks have been left with unsaleable assets and problems funding some of their commitments. The UK’s Northern Rock and Germany’s IKB were among the casualties. The most dramatic blow-up was, however, Bear Stearns – the US investment bank had to be saved from bankruptcy in March by the Federal Reserve and J.P. Morgan. J.P. Morgan officially purchased it for $2.2bn in May.
Hiring and firing
Unsurprisingly, banks have been cutting staff. The Centre for Economic and Business Research reckons 11,000 jobs will be lost in the City in 2008 and 20,000 will have gone by the end of 2009.But although revenues are down 40% or more on 2007, most banks have resisted chopping staff too deeply at the time of writing. Merrill Lynch, Citigroup and UBS are cutting ‘only’ 10% of their workforces, for example.
What does this mean for graduates? So far, graduate recruiters are surprisingly upbeat. Some studies have even suggested that investment banks and fund managers plan to take on more graduates in 2008 than they did in 2007 – although we think this seems unlikely. What is more probable is that it will become increasingly important to land a summer internship as a route to a full-time banking job. As graduates are low-cost employees, you’re less likely to lose your job as a trainee than as a senior banker. Stephanie Ahrens, head of graduate recruitment at Morgan Stanley, says: “A lot of the cuts will be coming in more senior posts. Banks still need to develop future talent and as such entry-level positions shouldn’t be affected.”
This article is taken from the eFinancialCareers guide – Careers in Financial Markets – Europe 2008/09. The guide will be available in your careers services from the beginning of October 2008 and will also be down loadable from the Student Centre – www.efinancialcareers.co.uk/students.
© 2008 eFinancialCareers Ltd
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