"We cut 25% of people in a day, one week before Christmas"
What's the matter with investment banks? Have they gone soft? As revenues plummet and markets gyrate, cuts so far look distinctly tame.
Jefferies is a case in point. Last week's results for the first nine months of 2022 revealed a 53% fall in pre-tax profits and a 27% fall in revenues. And yet, headcount was down by less than 3%. Similarly, RBC Capital Markets has cut less than 1% of its investment banking team, despite a 23% drop in its underwriting and advisory fees. And Goldman Sachs' job cuts amount to around 2% of its total staff, even though its net earnings in the first half were down 44%.
It wasn't always thus. In the past, when banks needed to cut costs, there was no piffling around the edges and no attention to the sensibilities of staff. Cuts happened in a manner that suited the bank, not its people.
Peter Hahn, Emeritus Professor of Banking and Finance at the London Institute of Banking and Finance, recalls that reality. Three decades ago, when he worked for Kidder Peabody, an American brokerage firm that no longer exists except as some systems somewhere within UBS, Hahn says the decision was taken to cut staff before bonuses were paid. On bonus day, shortly before Christmas, the order was given. "We blew away 25% of people in a day, a week before Christmas," says Hahn. The bonus pool went 25% further as a result.
In London, if you're put at risk before your bonus has been paid you're not legally entitled to receive it, even if it's already been awarded. Banks are still known to take advantage of this loophole, but this year the presumption seems to be that headcount will be mostly maintained and that the bonus pool will be savagely cut instead. At Jefferies, for example, spending on compensation was down 31% in the first nine months.
Why the change of approach? Jefferies' CEO Richard Handler's September letter to employees offers some hints: Jefferies isn't "shrinking to succeed" said Handler; it's playing "smart offense." In his October letter, Handler said the bank is all about teamwork and helping each other out: "We all must bear the brunt of supporting each other, especially in times of cross currents."
It would be wrong to suppose, though, that hard decisions are no longer taken. Witness Coinbase, which was also focused on being a caring, sharing place to work until it decided to cut nearly 20% of its staff, including incoming graduates in June. Witness, too, SoftBank Investment Advisors, which was initially thought to be cutting 20% of staff, but then opted for cuts of 30%. Senior people at SoftBank were said to want to cut 50% instead.
The danger is, that at some point, the rest of the market might have its own SoftBank moment. Until then, the presumption is that bonuses can be cut instead, that investment banking revenues will return to their long term trend levels in 2023 and that this year's outperforming business areas (commodities, rates, equity derivatives), will help keep things afloat. This in itself is encouraging senior people to swap jobs in an attempt to lock-in last year's pay levels.
"Every bank is hanging on to staff because it wants to be a survivor," says Hahn. "There's an optimistic bias. But the history of the past few downturns is that the industry is late getting rid of people, and then late hiring them back again."
Image: Goya, via YouTube
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