First came asset write-downs. Then came bailouts. Now, the U.S. government is taking a large, voting equity stake in Citigroup.
The chain of events pulling significant pillars of the financial industry from shareholder to government control is coming to look increasingly inexorable. But what does nationalizing a bank do to the careers and compensation outlooks of professionals who work there?
Constrained upside will drive producers and senior executives to seek better opportunities elsewhere, warns Joe Ziccardi, chief executive of search firm Cromwell Partners. "Wall Street superstars - big producers who generate significant fees for their employers - will not allow their quality of life to be changed by government bureaucrats and politicians," Ziccardi tells eFinancialCareers News. "There is already a huge groundswell of talented people positioning to go out on their own or team up with other successful people to form their own boutiques. They are just waiting for the dust to settle."
'Plain Vanilla' Pay
Nationalized institutions will have to operate in "cleanup mode," which means less risk-taking and consequently less compensation, says Adam Zoia, managing partner of Glocap Search. "Return on capital will go down because the types of risks that a nationally owned bank can take are going to be circumscribed," he explains. With risk and innovation stifled among nationally owned banks, Zoia foresees "plain vanilla" returns leading to "plain vanilla kinds of pay." Meanwhile, institutions that remain in private hands can continue to take risks, earn higher profits, and therefore pay their people more.
Another recruiter fears the influence of Big Brother: overweening, heavy-handed control by bureaucrats "even less capable than the bankers who screwed up." That possibility, he says, is already leading some professionals to leave Citi for jobs that aren't necessarily better than their current roles.
"You'll see people starting to leave because they want to go into a culture that's less stifling," says this headhunter, whose focus is investment banking. "Once the government gets involved you're going to have people who don't know what they're doing running a place that was run before by people who didn't know what they were doing."
A More Sanguine View
However, Jay Gaines, chief executive of Jay Gaines & Co., holds out hope for a "benevolent win-win form of nationalization" where banks get the aid they need, without being subjected to excessive oversight.
The model might resemble Fannie Mae and Freddie Mac, which fell under U.S. government control last September but haven't undergone major operational changes or suffered an exodus of employees. The government's conservatorship reportedly led to a change in Freddie Mac's bonus plan that reduced compensation for senior-level staff by as much as 25 percent. (On Monday, Freddie Mac said its Chief Executive David Moffett - a private-sector bank and private equity executive who the government installed there in September - resigned "to return to a role in the financial-services sector.")
Gaines acknowledges that nationalization could affect bankers' pay, but adds, "Compensation will be forced down universally in large institutions, nationalized or not, until they're healthy again and until they start making money."
Ziccardi observes a silver lining in the form of "strong boutiques" that will ultimately emerge and become magnets for top talent. "These boutiques will quickly become the new 'players' in the financial arena as the old firms fail," he says. However, he says government-run banks could co-exist as "training grounds" for junior and mid-level professionals. "Junior level people will get their experience at these banks and then get recruited away to a place that can/will pay them significantly more money."