By now, many people have heard about that guy in Newport who keeps asking the local council to let him excavate their landfill site. He used to have a mining rig in the early days of bitcoin, but had some bad luck and lost his hard drive, so in principle, there are hundreds of millions of dollars’ worth of magic numbers buried among the town’s unrecyclable garbage.
Considering his position helps you understand the labour market for investment bankers at the moment, weirdly enough. They can’t bear to give up on dreams of a buried pot of gold.
It might be considered a bit early to be writing off 2025 – a lot can change in a couple of quarters in the investment banking industry – but a lot has already changed. It’s almost exactly three months since David Solomon of Goldman Sachs said about equity capital markets and M&A revenues, “I think in 2025 we will certainly be at 10-year averages. We might even be ahead of 10-year average”.
Of course, everyone was more optimistic in those halcyon far-gone days of three months ago. Solomon also said, “The first 100 days, obviously, will give us some indication about the balance of whether it’s trade policies, immigration policies, energy policies, tax policies — how the combination of those things will come together”, and in fairness, they have. How desperate are things?
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To be honest, not really all that desperate. Global revenues for the year to date aren’t recovering to cycle average levels, but nor are they collapsing. The European and Asian regions have got up off the floor, showing decent percentage growth from a low base, which has more or less offset bad conditions in the USA.
So from the point of view of your average Wall Street CEO, there are really two bad things going on. First, debt capital markets are no longer in boom conditions and so can’t fill in the revenue holes elsewhere (for what it’s worth, for year to date, total global investment banking revenues are tracking down 10 per cent according to Dealogic). And second, the cost base is sized for a recovery, not for another lean year. The banking industry didn’t make layoffs on anything like the usual scale during the 2022 deal drought.
And the reason that the cost-base is oversized is where the resemblance to James Howells and his bitcoins comes in. Everyone knows (or thinks they know) that the conditions of the last two-and-a-half years are revenue postponed, not revenue cancelled. The private equity industry has so much money, so much dry powder waiting on the sidelines, so many exits and acquisitions … wouldn’t it be just the worst thing to cut back your headcount, and then find yourself missing out on another bonanza?
The essence of managing an investment banking franchise is that the biggest driver of success is the capacity to bear pain. Profits are cyclical and transitory, but market share is very persistent; once lost, a client relationship is very difficult and expensive to win back. Goldman Sachs and JPMorgan are at the top of the tree because they have been “long-term greedy” and understood that preserving the franchise is more valuable to shareholders than any year’s dividends or buybacks. Other banks are much further down – and much less profitable in the industry – because they have tried to use cost-cutting to generate stable earnings from a cyclical industry, eroding their client base and tarnishing their reputation as employers, one “shareholder-friendly” move at a time.
Which explains where we are today. The industry is overstaffed, the outlook for bonuses is bad but there are no jobs to go to. And management teams are getting grumpier and bossier. But nobody wants to be the first to give up on the buried treasure. For now. Anything which changes perceptions of the long-term value of the financial sponsors’ fee pool, and its centrality to the investment banks, could be very dangerous to the career prospects of bankers.
Don’t have too much schadenfreude at the private markets crowd – your job is quite likely to be downstream of theirs.
