Three recent deals involving investment banks suggest a reshaping of the industry is underway, but beyond the perfunctory coverage of their press releases the deals haven’t drawn much attention. But each says something significant about where the industry has been – and where it might be headed.
It’s been a dramatic few weeks in investment banking. No, I don’t mean bankers’ collective shock at the re-election of President Obama. The drama was more existential than that.
First, UBS signaled a major shift in its strategy, announcing it would sharply reduce its fixed income business and shed 10,000 jobs. Next, feisty Jefferies Group was absorbed by its largest shareholder, Leucadia National Corp. Then just last week, Russia’s Renaissance Capital was bought by Mikhail Prokorov’s Onexim Group, which had taken a 50 percent stake in the firm in 2008.
None of these deals made much news. Maybe there were more important things to cover, like the election’s aftermath and the fiscal cliff. Or maybe everyone is tired of reading about the ups and downs of investment banks – their brushes with scandal, surprise trading losses, gloriously paid chieftains and legislative lobbying juggernauts.
Nor could you look to the banks themselves for much insight. They were unusually quiet about their strategies following these announcements. The glowing post-deal media feature, a well-worn page in the banking PR playbook, was nowhere to be found.
Maybe no one really knows what’s ahead for the industry.
A decade ago it was fairly easy to predict the rise of the boutique advisory firm. Eliot Spitzer had just fortified the wall separating bankers from investment analysts, and corporate clients were wary of the conflicts embedded in big banks. Smaller firms like Evercore, Greenhill, Lazard and Jefferies flourished in the new environment.
Jefferies was somewhat different in that it also had a trading and capital markets business. But its exposure to European debt during the Euro crisis last year briefly threatened to shutter the firm, but quick trading and strong communication saved the day.
The rise of the emerging-market bank was another trend that was easy to spot, nearly 20 years ago. As trade and capital markets opened in Latin America, Asia and Eastern Europe, specialized investment banks popped up like cactus flowers after a rainstorm.
Eventually, some were gobbled up by bigger firms, like Garantia bank in Brazil, which was bought by Credit Suisse in 1998. Others crashed under their own weight. (Remember Peregrine Investments, which was once a powerhouse in Asia?)
Similarly, RenCap’s growth in the early part of the decade marked the rise of Russia and Emerging Europe. At a time when most of the big banks served the region through small local offices fortified by pinstriped hoards dropped in from London, RenCap built strong offices locally supported by a hub in Moscow. Their local knowledge and local touch were a winning combination. But the recession and weakness in the oil sector hit RenCap hard.
Wall Street’s last incarnation – the giant trading and principal-risk-taking machine – ended badly for just about everyone (except the lucky few who escaped with their bonuses intact). It is the remains of this machine that UBS is now dismantling. In its place it hopes to build out its wealth management business, a strategy that Morgan Stanley is also pursuing. But whether these businesses can sustainably make money for themselves and their clients in a low-yield world remains to be seen.
So what’s next? What innovation will spark the next transformation in investment banking? Or will it become a low-margin, low-return business?
Remarks by Goldman Sachs CEO Lloyd Blankfein last week at an investor conference suggested one possible future: investment banks that are even more reliant on technology for trading and processing. According to an article in the Financial Times:
Mr Blankfein on Tuesday emphasised the importance of new technology in executing trades on behalf of its clients and in the bank’s risk management processes. The bank has been rolling out new systems that allow it to calculate the impact of upcoming Basel III regulatory capital rules on individual securities, Mr Blankfein said. Goldman also started GSessions, an electronic trading system for corporate bonds, earlier this year, for instance.
I wonder how the legions of Goldman bankers, traders and risk managers feel about being replaced by an algorithm. I wonder how the shareholders feel about it, too.
There’s another future for Wall Street, although it remains a long shot right now. It’s tied to the growth of carbon-risk management, an activity that will grow if policymakers get serious about curbing carbon emissions to tackle climate change.
There are some hints, in the wake of Superstorm Sandy, that carbon legislation might reappear. If it does, ideally through a cap-and-trade system, carbon would become an enormous asset class, with abundant risk management and investment opportunities. Wall Street investment banks could be busier than they’ve been in years.