A funny thing happened when Swiss banking giant UBS announced last month it would eliminate 10,000 jobs, the first big move in dismantling its big investment bank. Its shares soared.
Investment banking was the glam end of the banking business and included fixed-income trading, equity capital markets, brokerage operations, and mergers and acquisitions. It was associated with big risk and big rewards, and every global bank of any size got into the game because that's what global banks did.
"As long as the music is playing, you've got to get up and dance," Chuck Prince said in 2007, when he was still chief executive officer of Citigroup.
A year later, the music stopped playing and Citigroup almost went bankrupt when its massive bets on collateralized debt obligations went wrong. It was saved by a government bailout.
Now, four years after the financial crash that eliminated Lehman Bros., the music is stopping for other global banks. Glamorous, high-paying jobs are being eliminated in the thousands, apparently with enthusiastic shareholder approval.
When UBS's brutal cull got under way – employees in London were simply locked out of their offices – the shares went up about 20 per cent.
Other banks – among them Nomura Securities and Royal Bank of Scotland (RBS) – are also blowing thousands of suits out the door. Finance jobs are disappearing in Europe's other banking centres too. The Centre for Economics and Business Research estimates that the City of London (the name for the financial district) will lose 30,000 jobs this year alone, according to the Financial Times. The post 2008 job-loss total could reach 100,000, according to some estimates.
While this may be bad news for the City of London and the restaurants, accountants, cab drivers and retailers that feed off it, like pilot fish around a shark, it's not bad news for anyone else.
Investment banks got too big too fast, to the point they put at risk entire economies because they became too big to fail. The banks evolved from the handmaidens of industry to speculative monsters, feasting on the very industries they were supposed to serve. The what's-in-it-for-me spirit of some of the investment banks was summed up by Matt Taibbi in his 2010 Rolling Stone article, which memorably likened Goldman Sachs to "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money."
But the banks were also their own worst enemies, and not just because they lost the PR game. They also lost control of their costs, in good part because of excessive salaries and employment numbers, especially back-office jobs. According to the Financial Times, staff costs as a percentage of operating expenses for UBS were an outrageous 69.5 per cent in the latest financial year, almost double that of Nomura.
Generally speaking, banks are ditching businesses where thin market shares do not justify the cost base. UBS's share in fixed-income, for instance, was only about 4 per cent – too small to keep. Some smaller banks had twice that share. RBS is concentrating on fixed income and shedding its cash equities, brokerage and equity capital markets businesses.
The world has changed a lot for the investment banks since the 2008 financial crunch and recession, so more culling is inevitable. Trading activity has never fully recovered to pre-2008 levels, initial public offerings are way off the mark, and economies in Europe and in North America are either in recession or growing so weakly that it's hard to tell the difference.
The biggie is tighter regulation and capital requirements. The European Banking Authority is insisting that EU banks maintain so-called Tier 1 capital (largely common equity and retained earnings) of 9 per cent of their risk-weighted assets. Stress tests determined that dozens of capital-deficient banks will, collectively, have to raise about €116-billion to meet the new capital requirements. More capital equals less leverage and lower returns. Bye-bye business.
Shrinking banks are a heartwarming sight. Besides posing grave risks to taxpayers because of their outrageous size – the assets of UBS and rival Credit Suisse Group at one point were 680 per cent of Switzerland's gross domestic product – they sucked up too much talent from the greater economy. Bankers became bankers not so much because they were morally and intellectually suited to float dubious Russian and Chinese companies on the stock market or trade derivatives, but because it paid a hell of a lot more than being a dermatologist, lawyer or fertilizer salesman. Soon, entire generations of university graduates wanted to cash in on the investment banking craze.
There is no shortage of bankers, real estate agents and even politicians, like London Mayor Boris Johnson, who think the banks' crash diets will damage local and national tax revenues. Britain is especially worried about the job losses because it readily let its grubby manufacturing industries slip away decades ago.
The fear is unwarranted. If smart, ambitious people do not go into banking, they will go into other businesses. They might become entrepreneurs – remember them? – and create jobs instead of working for planet-gobbling corporations, ruled by quarterly earnings targets, that use their muscle to eliminate the jobs of lesser competitors. Investment banks will certainly continue to exist in different (though smaller) forms. What they won't be is focused entirely on climbing the league tables for no discernible reason beyond ego and outrageous profit.