The History of Trends in Investment Banking

Collapse and Revival

JP Morgan specifically, the person whose bank is named after him, is historically known for saving the entire country of the United States from the 1907 Knickerbocker Crisis. This particular crisis involved a panic that occurred on Wall Street in October that year when, during a time of recession, many banks and trust businesses filed for bankruptcy. If it was not for the contribution of Morgan to invest large sums of his own money in addition to convincing others of similar wealth and status to save the banking system, it would have ended then and there.

While a powerful resurgence to the economy resulted in what is now known as the “jazzing” or “roaring” ’20s, excessive market speculation on account of loans via the Federal Reserve caused Wall Street to see yet another collapse in the early ’30s, creating the historical Great Depression.

The Great Depression

During this time, the banking system of the United States neared complete and utter ruin, with close to 40 percent of all banks being forced to either merge or implode. However, early into the 1930s, the Glass-Steagall Act was instantiated by the federal government in order to repair the damaged banking industry by dividing the line between what is known as investment banking and what is known as commercial banking.

Moreover, the government made efforts to divide the line between brokers and investment bankers such that their conflict of interests would not see negative repercussions to the outside economy. These conflicting interests include the investment bankers’ desire to maintain a steady stream of business with regular customers and the desire of the brokers to provide fair and honest service.

The greatest generation, known for the working-class Americans alive during the time of the Great Depression, rose up to slowly repair the damages made by the upper class and bring profitability back to the businesses that were engineering America’s growth and future. Through the next 40 years, the economy saw the greatest recovery in its entire history.

Rise of Derivatives and High-Yield Products

Unfortunately, more problems were still ahead. After the 1975 negotiated rates repeal, many commissions of trade saw collapse and the profitability involved therein quickly declined. Due to this fact, any and all organizations whose sole purpose was dedicated to research saw themselves merging with other companies that provided different necessary economic skills. As a result, the integration of sales, research, trading, and investment under the title of investment banking was complete.

Between the late 1970s and early 1980s, the rise of economic products including derivatives and structured high-yield products took place; both of which provided bountiful returns for the investment banks. In addition to this, corporate mergers were observed by many investment bankers of the time as the final pool of gold. These same bankers operated under the assumption that the Glass-Steagall Act would one day collapse; leading to the business of financial securities being overrun by the now differentiated industry of commercial banking. By 1999, their predictions came true, albeit without repercussions that were nearly as dangerous or severe as before.

IPOs and Broad Banking

When the 1980’s finally came to pass, the investment banking industry successfully shed its previously shady image in exchange for reputable flair and power; enhanced by countless “mega-deals” during times of high economic prosperity. This prosperity managed to persist deep into the 1990s, a time when initial public offerings (IPO) were endlessly booming.

For instance, in 1999 alone, a staggering 548 deals were performed (the most ever in a single calendar year up until that point). Just before the new millennium, the Gramm-Leach-Bliley Act (GLBA) was enacted; repealing “the long-standing prohibitions on the mixing of banking with securities or insurance businesses under the Glass-Steagall Act”, thus permitting “broad banking”.

Fluctuation in Bank Employees

In more modern times, between the years of 2006 and 2009, the number of employees at all investment banks in the United States has fluctuated by an amount that would appear to be mild if not for the fact that there exist less than 200 individual investment bankers in the country. Between the aforementioned years, the amount started roughly in the middle, approximately 156 employees in the year 2006, to its highest of 184 in the year 2007, then a sharp decline to 137 following the economic crisis of 2008, to finally 115 in 2009. Moreover, the number of establishments coincided with the trends of employed bankers. In 2006, the number of American investment banks in operation started at approximately 8, to its highest of 9 in 2007, then a similar sharp decline to 5 between 2008 and 2009. Despite a small resurgence in 2010, the bearish downward trend in the number of employees has continued due to technology’s exponential growth and a lower supply of revenue for the banks.

Since then, the amount of bankers, salespeople, traders, and researchers at the world’s most powerful banks has seen a 20% decline according to London research firm Coalition Ltd. This particular amount of data came after 10 of the largest firms trimmed down 4 percent of employees (roughly 2,100) in 2014 from the previous year amidst a rough trading atmosphere on desks of fixed income. However, salaries have maintained their extremely generous figures for both new and old employees, starting from $100,000 all the way up to 1,000,000 after bonus/years of experience.

A human resources (HR) planner would take the above information into consideration by assessing that the cuts on the workforce are representative of the banks’ effort to squeeze profits out of a more difficult environment directly catalyzed by crackdowns on excessive borrowing and shady assets. The lever of pay for the investment bankers and security traders is a key factor when maintaining cost control. Unfortunately, an HR planner would also assess that these reports do not factor in the employees who do labor in support or back-office functions. Furthermore, the report fails to include wealth management corporations that have seen major success amidst the rebound of the stock market and the necessity of the baby boomer generation for a financial consultation.

While the number of employees has seen a decline, the ones remaining, typically with salaries ranging between $300,000 to $400,000, are kept on close watch. These shifts in employment tend to create a chain reaction throughout the entirety of New York’s labor statistics. According to data commissioned by the New York Department of Labor demonstrates that employment in the securities and investment banking sector of Wall Street has seen a significant and steady downward trend since before the 2008 financial crisis; noting a 20 percent overall decline between the years 2007 and 2014.

An HR planner would agree that this has stagnated any potential growth of the generalized financial service sector in the last couple of years; despite the fact that the statistics of private employment has seen an increase of more than 8 percent. These numbers coincide with the increase of hiring in sectors of consultation and the food/beverage industry.

Even if the trading markets see a bullish uptrend, experts continue to assess a decline in overall hiring. According to ex-Wall Street analyst turned New York University financial professor Brad Hintz, “the street is beginning to look at its costs and run itself much more like an industrial company”. Despite all the transformations that have taken place within the industry over the past 30 years, pitches made to the new recruits about what an investment banking career entails and offers have somehow remained completely unchanged. Conversely, the modern investment banking system is almost completely unrecognizable from its former self as described before.

Disruption and New Ideas

The millennial generation, now slowly becoming the majority of the workforce, continues to pursue companies that attempt to innovate or disrupt the world and as such will be able to easily see the impact of what they are doing. What has been proven to be more important to them than structure or high compensation includes the powers and freedoms associated with the customization and schedule flexibility. While innovation is often welcomed as an inevitable stepping stone to success in regions such as Silicon Valley, innovation in the region of Wall Street is noted to be the direct catalyst of historical financial crises. Due to the fact change is perceived as a risk, very few new ideas ever reach the top of the industry.

To make matters worse, due to the intense regulation of the work environment, investment bankers of decades-long experience continue to teach the exact same modus operandi that guaranteed success when these banks first started. While many new recruits come in hoping for an exciting, adventurous opportunity, they are met with lifeless “regulation, commoditization, tedium, and bureaucracy”. This particular problem was exacerbated by the most recent financial crisis of 2008, where packages of compensation that were outsized saw themselves being dialed back, the overall banker career perception rotted into negativity, and any promises of a potentially bountiful or exciting career failed to be kept.

Failure to Attract Talent

Social media continues to worsen and discourage the situation as information is ever-flowing at a rapid pace; exposing the pros and cons of investment banking experiences at light speed. Consequently, recruits continue to learn that the reality of investment banking will more often than not fail to meet their wildest dreams. According to veteran Wall Street executive Ken Moelis, the only existing branch of the financial industry that is attracting any sort of real talent is the hedge funding business due to the fact that new and enticing ideas are given a proper “platform to develop and materialize”.

Consultation and advisory experts have become tired of having to sell financial management products and capital market products to clients; as such, they have left numerous large firms by the hundreds to focus their efforts exclusively on deal-making and unique transaction experiences at “independent banks, elite boutiques, and private equity firms”.

Instead of attempting to fix the experience to handle the massive amount of movement away from the investment banking industry, these so-called “bulge-brackets” are trying to force policies on the millennial generation to attempt to cater to their needs. While some include policies that serve to cater to their desire for the proper balance between work and life, most of them are seen by industry insiders as ineffective; remaining unsupportive of any kind of innovation, and continuing to fail to address the primary root of the issue at hand.

Looking Forward

It has become urged by many within the industry that Wall Street attempts to break itself away from the historical and conventional methods of recruiting, developing, and retaining talent; as the tactics from decades-old go unchanged and fail to take into consideration the perception of the next generation.

As the burden of regulation continues to persist as a problem across all financial firms, it has been statistically proven that independent banks, partnership-focused/driven organizations, and impresario firms are the ones that have provided a safe, powerful haven for recruits of high-performance to find impactful, meaningful work.

It is critical to keep in mind that the overall future of the financial industry and its markets, including investment banking, coincides directly with the direction of the economy. As such, turbulent periods in the economy create job insecurity for existing and aspiring bankers. As Citigroup has recently announced preparations to lay off many employees from its countless investment banks around the globe, the biggest firm in the world known as Goldman Sachs has already downsized its entire division by a staggering 10 percent.

Finally, the bulk of the income that formerly went to massive pools of human investment bankers is now directly funding emerging technologies such as FinTech that are attempting to automate large percentages of the financial industry. This exponential trend continues to double every year. Regardless of millennial interest or any changes in the economy reducing the number of jobs, the final line of interest that cannot be ignored is the continued promise of a lavish, luxurious lifestyle with an extremely healthy salary between six and seven figures every single year.