Three leading investment banks have hired 6,400 people this year. Is this viable?

2007 was before the financial crisis hit. In 2007 Northern Rock was still offering 110% mortgages and it was fine to confess to being a banker in polite society. Bear Stearns was still around; Jimmy Cayne was blithely playing bridge. And Johnny Cameron and Fred Goodwin both thought they were Bob Diamond.

In 2007, there was some crazy hiring. Goldman Sachs increased its headcount by 9,000 people, or 34%, in a single year. And then everything went to pot.

For the first time since 2007, 2010 has been a year in which leading banks appear to have been making net headcount additions.

This is a change to the recent past. Between 2008 and 2009, headcount at the leading banks (Goldman, Deutsche, Credit Suisse, UBS, JPM) fell 11%. Last year, it rose by just 0.05%.

So far, only Goldman, Credit Suisse and JPM have published headcount figures for Q3 2010. However, these three banks alone have hired 6,400 people since the end of 2009 - an increase of 8%. Goldman has said most of its hires were in the middle office.

How long before they get rid of them again?

This would be cause for excitement, were it not for the fact that the past two quarters have been so unpromising.

As the bubble diagrams below, generated by analysts at KBW (click to enlarge), depict, the third quarter was not pretty.

Whether this necessitates redundancies depends upon whether you think this is a blip, or a trend.

Optimistically, some analysts are going for the blip theory. "We don't view results this quarter as the start of a more negative trend," said analyst Mark Lane in reference to the terrible third quarter results at Morgan Stanley. And Bernstein Research analyst Dirk Hoffman Becking has released a note this morning proclaiming that UBS's ambitious FICC revenue goals are still feasible once customer flows return - probably sometime early next year.

Nevertheless, compensation costs are creeping up. Last year, Goldman's were 35.8% of revenues; this year Lane is predicting 41.8%.

The biggest immediate problem, however, is Credit Suisse. In the third quarter, total costs in the investment banking division were 89% of revenues. To bring this down to the 70% rate which is acceptable across the industry, CS will need to cut costs by CHF649m.

If it were to do this by headcount alone, Credit Suisse would need to cut 2,000 people. Coincidentally, this is almost all the hiring it's done since 2008.