Our Take: Where's the Silver Lining?
This week brought more than its share of carnage. But there are some areas where banks are likely to maintain or accelerate investment.
We've been saying since October that Wall Street's hiring and compensation outlook rests on the breadth and magnitude of write-downs from banks' fixed-income exposures. The street's latest crop of fourth quarter numbers proved even worse than many bears had forecast.
Although neither Merrill Lynch nor Citigroup - who posted identical quarterly losses of just under $10 billion each - would confirm reports of fresh layoffs, they didn't deny cutting heads. Add to that the hundreds of layoffs from credit rating services, the prospect of further job losses from a Bank of America-Countrywide merger, and the ongoing threats to the credit standing - and therefore the survival - of bond insurance firms and you see a pretty grim picture.
Career opportunities in the investment world haven't suddenly become extinct. The industry still offers pockets of opportunity - business segments and functional specialties for which investment and headcounts are poised to grow even if the big picture stays gloomy.
A number of banks are aggressively expanding their wealth management activities - especially in the high-end, private client segment. Deustche Bank recently hired nine wealth managers away from Citigroup and other rivals to join its private banking offices in California, New York and Washington, D.C. Credit Suisse said Thursday it plans to add 1,000 private client bankers in numerous locations around the world by 2010. Barclays' wealth management division, which added 1,700 jobs in the last two years, is adding 800 more positions by mid-2008 in southern Europe, the Middle East, Africa and India.
Merrill Lynch's global wealth management unit, which includes both retail brokerage and a nearly 50 percent stake in asset manager BlackRock posted double-digit gains in profit and revenue during a quarter when the S&P 500 index slid 4 percent. Other banks also showed solid results in this arena last quarter. For example, Citigroup's wealth management revenue rose 27 percent.
Both banks and hedge fund managers have been raising capital for new funds designed to buy up the debt of troubled companies at deeply discounted prices. Recently, these efforts accelerated as the credit crisis magnified the number of potential bargains. To put their capital to work, the new distressed-securities funds will need portfolio managers and analysts who know how to evaluate and trade low-rated or defaulted debt. Even complex derivatives - the type of vehicles widely blamed for causing the credit crisis in the first place - are being eyed by big investors. Financial News reports that Carlyle Group is looking to raise $1.5 billion in commitments for a "synthetic collateralized loan obligation," an innovative deal structure built from credit default swaps on leveraged loans.
Merrill Chief Executive John Thain has repeatedly said risk management needs strengthening. Merrill just brought aboard a former Goldman Sachs executive, Noel B. Donohoe, as co-head of the department. Although there's been little explicit talk of raising headcounts or compensation for risk professionals, we believe that would be a natural development both for Merrill and other banks that got burned by CDOs, asset-backed commercial paper and other holdings with hidden exposure to sub-prime mortgages.
Specialized Funds Holding Alternative Equity and Property Assets
Merrill Lynch is transferring illiquid assets from its trading portfolio into new funds for sale to outside investors. It has created a Pacific Rim real estate fund and plans to create private-equity third party funds as well as infrastructure and special situations funds over the coming year. Facing the same pressures to limit risks and free up capital, other banks will probably take similar steps to offload certain risks to their customers.
When asked during Thursday's conference call where Merrill Lynch plans to continue investing, Thain mentioned Brazil, India and China.
Equity Trading - Or Not?
In the fourth quarter, Merrill's equity trading net revenue jumped 23 percent, propelled by "substantial" growth in client volume. Other banks have likewise reported strong results from equity trading. However, in view of how stocks are behaving in January, we wouldn't bet on Wall Street taking on more equity traders. While volatility often brings an initial spike in volume, bear markets tend to depress trading activity over time, as clients withdraw from the market - just as happened to Merrill's fixed-income client trading business last quarter. That would lead to less need for sell-side traders, not more.