Overhauling investment banks has leaped to the top of the U.S. political agenda. But don't leap to the conclusion your career prospects have been upended since noon Thursday.
Whatever the Obama-Volcker legislative program might do to banks' future profit streams or (equivalently) share prices if enacted, with very few exceptions career prospects won't be affected in dramatic or predictable ways. That holds true even for careers in business segments directly targeted by the bill, such as trading or prime brokerage.
Here's a rundown of roles drawing the greatest attention elsewhere:
As many informed observers have already pointed out, all the big banks scaled back explicit involvement in proprietary trading more than a year ago - in many cases, eliminating designated prop desks. The biggest remaining player, Goldman Sachs, has said prop trading generates around 10 percent of its revenue. That's a big chunk, to be sure. But Goldman and other banks that still operate either "proprietary trading" or "principal strategies" units have two obvious responses to any prohibition. They could spin off or sell those units as independent operations; or they could fold them into existing client-trading operations. Indeed, Goldman already contends that all its trading serves clients in one way or another.
Defining what constitutes "proprietary" versus "client" trading is a real challenge. Both securities dealing (i.e., trading with clients) and capital markets banking (i.e., underwriting) inevitably expose a dealer to the risk of price changes of instruments that pass through his book on their journey between customers. Both activities require the dealer to hedge - a form of proprietary trading. For the uninitiated, Reuters blogger Felix Salmon does a great job sorting out the process:
Let's say you're trading equities, and you want to make a bet that A will rise while B won't. Then every time a client sells you a block of A stock, you take your sweet time selling it on into the market, while your bid on B stock is less aggressive, and you will sell it with more alacrity. You're still a client-focused market-maker, but you're taking on extra proprietary risk.
Salmon also ably explains how banning banks from having prop desks would affect careers over the medium- to long-term:
If you ban internal prop desks, a lot of those prop trades and traders will simply remain on the trading floor proper, where they're nominally acting on behalf of clients - much of that risk will remain within the organization. But at the same time, if the Volcker rule passes, traders at investment banks will no longer be able to aspire to a career path where they first become prop traders and then eventually leave to start their own hedge fund, either internally or externally.
Alternative Asset Management Vehicles
The Obama-Volcker plan would ban banks from owning, investing in or advising hedge funds or private equity funds. That's led to speculation about career impacts on the many highly compensated and sought-after professionals who manage hedge funds within bank subsidiaries such as Goldman Sachs Asset Management. Making banks spin off those businesses might dampen the former parent's long-term profit growth potential (or not). But I've seen little evidence that such units would be less viable on their own than under a bank's corporate umbrella. In fact, the opposite could well be true. So there is no evident reason for staffers at bank-owned hedge funds who weren't already sending out resumes to start doing so now.
Dire predictions are being circulated that the Obama-Volcker plan would abolish banks' prime broker business. However, short of banning hedge funds from existing altogether (even when entirely separate from banks), it's hard to imagine how banks could be prevented from serving them as clients. And that means banks would still be indirectly exposed to risk from hedge funds' portfolios. Presumably, legislators and regulators will aim to control that exposure by mandating greater disclosure of lending to hedge funds and by general restrictions on bank's leverage and counterparty exposures (similar to those that apply to banks' dealings with other types of borrowers).
The bottom line: Banks having to divest particular business activities or divisions does not eliminate jobs in those activities or divisions. Nor does it eliminate the present value (to banks' current shareholders) of the expected future profits from those activities. They'll simply be spun off or sold off - thereby converting future value into present dollars for banks' shareholders.
Demand for compliance-related skills from settlement processing to securities law, already on the rise, looks to get a further boost from the Obama-Volcker plan.
The proposal falls within a broader context in which both U.S. and global regulators are pushing for increased capital cushions (reduced liquidity), greater discipline in risk-taking, and bringing unregulated products like OTC credit derivatives under the umbrella of regulation and organized exchanges.
That context doesn't make the Obama-Volcker proposals superfluous or meaningless. It does, however, make the change they represent less dramatic than appears at first glance. In other words, there has been considerable movement along the same lines already.