Behind these headlines, a more insidious danger threatens the investment banks. They are finding themselves sidelined by increasingly sophisticated (and, crucially, unregulated) hedge funds and private equity firms, which are happy to avoid the banks’ hefty fees and trade directly with one another, or to originate, underwrite and distribute corporate finance deals without allowing the investment banks their usual cut. KKR, for instance, one of the leading private equity firms, has found itself listed along with more traditional investment banks on a number of recent equity offerings, the 2010 bond placement for Manchester United a high-profile example. Citadel, a hedge fund, has become one of the major options market makers. “Boutique” investment banks such as Greenhill are winning mergers and acquisitions business from their larger peers. Given the fear of further lurches in the markets, fewer trades are being done than at any time since the crash, and now the investment banks are finding themselves under threat from erstwhile clients. It is no surprise that earnings at Morgan Stanley and Goldman Sachs – and at the investment banking divisions of other financial houses – have dropped significantly over the past year.
...
“Bankers don’t deserve and won’t get any sympathy, but if you think through the numbers: if you’re earning £1m a year, after tax that’s £500,000; after the amount that’s in stock that you can’t access for three years, that’s £300,000; and you’ve got to educate three kids privately. Bankers aren’t wealthy any more. And now people in traditional industry are earning more than bankers. But bankers can’t move to industry because of how tainted they are. I mean, if you were announcing your next CEO, if you were Marks & Spencer, for instance, would you want it to be a banker?
“What are the options for bankers now? Hedge funds aren’t up to much. Private equity is really struggling – they’re surviving off pretty slim management fees. So all the traditional jobs that bankers might move to are closed off. And being a banker, you don’t have the skillset to really innovate . . . most of us are no good at anything other than our own specialities within the world of banking. If you want to be an entrepreneur in the UK, you really need to innovate and bankers just aren’t smart enough.
