London’s Square Mile is expected to suffer job losses next year for the first time since 2001. But the signs are that the axe will fall less heavily and with more precision than during the downturn that followed the bursting of the technology bubble.
During the bear market of 2000-2003, a freeze in mergers and takeovers had a savage knock-on effect for the investment banks that earn fees on the back of corporate activity. The sector may have been in good shape financially, but the wider slowdown led to thousands of jobs being shed.
Today, the opposite is true. Non-financial corporations are in good shape and corporate activity is still taking place. It is now the banks that are in crisis. All the same, non-financial companies are likely to continue requiring the services of investment banks next year, mitigating the sense of despair in the City employment market.
Jobs will still be lost. A prevalent, if not consensus, planning assumption among many senior bankers is that activity could return to levels of three years ago – effectively rewinding the clock to the very beginning of the credit bubble.
“Parts of the business will shrink and people will go,” said one senior debt banker. “But what’s happening? It’s a repricing of risk, and once that flows through we’re back to, say, 2005 levels of activity – but we’re functioning again.”
A mergers and acquisitions banker offered the same assessment. “The really bad years were 2002 and 2003. Next year should not be so severe,” he said.
The Centre for Economics and Business Research says investment banks will bear the brunt of next year’s cuts, losing 2,300 positions, followed by the fund management industry, which will lose 1,600 jobs. The insurance sector faces about 600 job cuts, with professional services companies such as headhunters accounting for another 300.
Within investment banking, the most vulnerable will be those in so-called structured credit, who assembled the esoteric credit securities whose complexity and opacity have made them so unattractive to investors who now crave certainty and safety. The high-yield bond market, for example, has not seen a single deal in Europe since July, and the asset-backed securitisation market has dried up since the summer.
There is plenty of anecdotal evidence that bankers in this area, sometimes entire teams, have been quietly instructed to clear their desks over the summer.
“It is dead,” said one high-yield banker. “We will have to wait until the new year before we really know the scale of the problems in our market.”
But some in the credit world say many of these bankers are still in demand, since they have the skills to put a concrete value on the estimated trillions of dollars of structured credit assets that are clogging up the financial system.
As one debt capital markets banker says: “If the alternative is losing your job, you can reinvent yourself pretty quickly.”
Even as UBS announced a fresh $10bn (£4.9bn) writedown yesterday, the Swiss bank said it was not planning job cuts in addition to 1,500 announced in October.
Indeed, raising capital for the banking sector is expected to be a source of revenue for those investment bank employees who specialise in serving financial institutions. This provides potential for fees from share placings, selling strategic stakes and other equity-linked fundraisings.
Moreover, there are other sectors, such as natural resources and pharmaceuticals, that are ripe for consolidation. That creates plenty of potential for share-based mega-mergers.
All this potential activity may make banks think twice before making swingeing, across-the-board headcount reductions. But it also means bankers will have to be more adaptable if they are to avoid the axe.
