Investment banking: Snakes and ladders

Der Spiegel has a very interesting two-part article on the current crisis in investment banking.  It's well worth reading as an indicator that the economic slide that began in 2007/08 isn't over yet, and may in fact be getting worse (as I and other informed commenters have been saying for some time).  Here are a couple of extracts.

Last fall, only a few weeks apart, a businesswoman and a banker went to the Coq d'Argent, an upscale restaurant and hot spot in the world of London high finance, located on the top floor of a shopping complex, to end their lives.

The woman put down her purse and jumped from the restaurant's cozy rooftop terrace. The banker, an investment specialist, jumped into the building's atrium around lunchtime.

The "City," the casual term the financial center uses in reference to itself, was shocked. The suicides are the most glaring expression of an apocalyptic mood that seems to have gripped all of London. Hospitals are reporting a high incidence of patients with alcohol problems, while top restaurants are fighting for every customer.

The crisis has struck at the heart of the financial center. In 2012, banks began to downsize their investment banking activities. For years, the area had been seen as a playground for those seeking instant riches and guaranteed success, and it provided tens of thousands with sometimes exorbitant incomes.

October 30 would become a horrific day for the financial district after the Swiss bank UBS announced that it was slashing 10,000 jobs in the sector. On one morning alone, the bank's London office let hordes of bankers go. Some were intercepted at the entrance, still carrying their coffee in to-go cups, only to be shown the door a short time later with a piece of paper filled with instructions.

All he felt was hate, says a 51-year-old who was among those affected by the recent layoffs. For him and others like him, the chances of finding a new job are slim. The competition is also doing its utmost to downsize. Morgan Stanley plans to lay off 1,600 employees in the coming weeks, Lloyds is cutting as many as 15,000 jobs worldwide, and Deutsche Bank has just eliminated 1,500 jobs in its investment banking division.

An era seems to be coming to an end, the era of an industry that led us to believe that what it did was useful. In reality, though, it was lining its pockets by conducting more and more reckless transactions and involving itself in increasingly insane deals and products.

. . .

The machine ... made the banks rich and made it easier for the rest of the world to live on borrowed money. In the end, however, it began to destroy itself, generating one scandal after another.

Banks manipulated the LIBOR interest rate, which affects financial transactions worth hundreds of trillions of dollars. They foisted risky assets on customers and became involved in money laundering and tax fraud. Traders like Kweku Adoboli (UBS), Jérôme Kerviel (Société Générale) and Bruno Iksil (JPMorgan Chase) gambled away billions through risky transactions, either on their own or with their departments.

Former German President Horst Köhler once described the financial markets as a monster controlled by investment banks. Since 2008, politicians have been trying to tame the monster and assume control.

For instance, they want banks to set aside more capital as collateral for risky deals in the future, which means that many areas will hardly be profitable anymore. Banks and bankers are to be forced into a tighter corset -- but they are fighting back.

. . .

Bankers are especially upset over the move to sharply curtail personnel costs. There is no other industry in which workers cost as much as in investment banking. "This is the only industry in which labor has exploited capital," jokes one adviser.

For this reason the mass layoffs at UBS -- which is completely abandoning large portions of its investment banking business following the appointment of Axel Weber, the former president of Germany's central bank, the Bundesbank, as supervisory board chairman -- are seen as a warning sign for the entire industry. It is "as if Daimler stopped making sedans," says the head of the German division of a major US investment bank.

There's much more at the link.  Highly recommended reading.

Peter