Wednesday, March 2, 2011

Banking and Diminishing Glory Days...

CLICK HERE --->; Sauros writes about the realities of being a banker in London and his own philosophy on prop trading. (I will respond to his prop philosophy in a separate post)

The Lord of Trading Blog is always a great read and highly suggested. One of the latest post, Feb 28, 2010, discusses the reality of being a banker and how the media misconstrues the whole industry based off a handful of individuals.

From my own experience ...The alluring mystique and Aura of "front office" and "Investment Banking" never failed to allude the young and clueless students during my Uni years. I say "mystique" because I'll wager that over 90% of the students interested, do not know what it means to be a front office Ibanker (and I say 90% generously). I myself,  am still quite clueless pertaining to many investment banking activities. Which is why I fancy conversations from first-handers who can tell me about the inner workings of the industry.

In one of my recent soirees I gained some info on Goldman Sachs' (GS) infamous/famous equity prop desk from one of their employee's This is the same prop desk that had stellar returns in 2009 post financial crisis, and the same model that every Ibank envied and attempted follow (often to their future dismay). Unfortunately, the models used by these desk are nothing more than copycat models from Long Term Capital Management days, and are probably not too far different from Event Driven/Market Neutral Hedge Fund (HF) guys (correct me if I am wrong). Though Id say the latter can be more innovative and flexible and more interesting on the whole. Probably, the LTCM models used by banks are now on steroids with "nano quantum particle split second flash light speed trading," (or something like that…?) but in all honesty the same idea… find relations between asset classes and exploit deviations from the relationship in whatever time frame one pleases.

Since I am no equity analyst, and for those savvy to GS, please bare with my ignorance if I am writing nothing new. I had found it most interesting that the equity prop desk post-2009, quarter after quarter kept on experiencing write down after write downs. The model that propelled GS to the headlines during 2008, and and led to some calling GS a HF Ibank, is now hurting its bottom line. So whats been causing the margin squeeze? It seems that lots of alternative players (HF and PE etc...) got tired of trying to innovate alpha and were sitting on loads of cash and thought getting beta was easier. Throughout 2010 more and more new big alternative players entered the market-making game. This has been and is killing GS's market shares with just as fast, nimble, well equipped, and intelligent players in the game. This is also not to mention how terribly flat volume was for equities in 2010 along with Dodd-Frank reform constrictions.

Goldman Sachs is just one example, but I am sure other Ibanks with similar models are dealing with similar and/or different problems themselves. Despite such troubles within Ibanks, the exterior and the context that the media frames these banks are akin to god-like entities that continually and exponentially thrive and grow on opulence and greed. Unfortunately for bankers… as Sauros does point out, front office opportunities are shrinking (such as trading imo), and those with mega 7 figure bonuses are relatively far and few. The reality is far from what is perceived, as perhaps, the majority of front office bankers slave at relative modest compensation for as long as they can before burning out or moving on.

 Despite some bleak aspects in front office I do not feel all the opportunity is gone, at least in the short run (a few years?). M&A and to an extent underwriting presents many growth opportunities outside the "developed" nations. Lack of expertise and immature capital markets in emerging countries present limited opportunity for international investment banks to benefit. Unfortunately this is fast fleeting, as seen with the trend in international corporate bank's margins getting squeezed due to increasingly competitive domestic banks.

On the US/Eurozone domestic side, perhaps longer term growth can be sustained in M&A and underwriting as economies turn around and corporates unleashed pent up cash. The extent of such sustainable growth depends such deals being able to truly add value and are not done purely for short term $$$$$ gains. Further more there is risk of tighter regulation and financial reform which may mitigate these opportunities further.

Despite big hurrahs about "fat cat greedy bankers" coming from the media and public, the truth is perhaps much different. International Banks have become giant monolithic elephants with diminishing opportunities for the average wannabe or current workaholic driven bankers.

Now is the time to move from yesterdays story and start focusing on the next big bubble!


Alexander Lê
Managing Partner
Analyze Capital LLC

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