WASHINGTON, Oct. 21 (UPI) -- "Don't put your daughter on the stage, Mrs. Worthington" caroled Noel Coward in the famous 1936 hit. With the current troubles in the financial services industry, there is another career that a loving mother should best avoid for her offspring: banking.
In the original song, Coward's advice to Mrs. Worthington is based on the doubtful charms of the daughter ("I think, on the whole/An ingénue role/Would emphasize her squint.") In today's economy, however appealing, intelligent and well trained the daughter, banking, and financial services in general, is not a profession Mrs. Worthington should find attractive for her.
In the 80's and 90's, of course, for the right sort of daughter -- workaholic, numerate, detail-oriented and mindlessly aggressive -- banking was right at the top of Mrs. Worthington's list. The industry was in a state of more or less permanent expansion, promotion was rapid, and the money was truly mind-boggling. There were only two disadvantages: the grueling, health-sapping hours you needed to work, and the difficulty of getting any kind of reasonable job offers once you turned 40, or even 35. Nevertheless, for a daughter or son in their 20's, the opportunity appeared irresistible.
In the late 90's, this began to change, even before the top of the boom. It appeared that there were other opportunities to make huge amounts of money that offered more interesting work and a less structured lifestyle than the lower managerial tiers of a major financial institution.
Even on Wall Street, a number of apparently successful executives were seduced into financial positions in the dot-com sector -- their industry contacts were of course thought to be very useful when the time came to do an Initial Public Offering. For a year or two, dot-coms appeared to offer the chance of even quicker money than banking, without the drudgery of working in a behemoth-sized organization.
After the stock market peaked in March 2000, banking remained attractive for a time, even as dot-com employment shriveled. Wall Street, having hired heavily in 1999, did not want to put its hiring into reverse immediately, because it believed (as did nearly everybody else) that the downturn was temporary and that the market, and financing volumes, would soon come roaring back, albeit maybe not in the same sectors that had been so strong in 1998-99.
Merrill Lynch, for example had laid people off during the market dip in late 1998, and was badly caught by the 1999 rebound -- hence for most of 2000 the firm remained modestly in hiring mode. Its full time global headcount rose from 67,900 at the end of 1999 to 72,000 at the end of 2000, and its number of "private client financial advisors" from 18,600 to 20,200 over the same period. Only in 2001 did Merrill Lynch employment decline, to 57,400 at the end of the year, of which 16,400 were private client financial advisors. By 30th September 2002, staffing had declined further, to 53,400 of which 14,600 were private client financial advisors (the latter figure being down fully 28 percent from the December 2000 figure.)
More dramatic has been the headcount reduction in some of the banks that were acquired in the boom years. J.P. Morgan Chase, in this respect, has been a particular offender. Hambrecht and Quist, the Californian investment bank bought in 1999 for $1.35 billion has almost disappeared, while Flemings, the British merchant bank acquired in 2000 for the astounding sum of $7.7 billion, has seen its headcount reduced, according to industry sources, from 3,000 to 200 since the acquisition.
Mrs. Worthington should thus have two problems with the financial services industry: job insecurity and dreadful management. For an industry that claims to advise its customers on their investments, to blow 10-figure sums not once but twice on investment banking operations bought at the top of a market and essentially worthless 2-3 years later shows an inability to live up to the marketing hype that is truly staggering. Both Flemings and Hambrecht and Quist were high quality operations, whose owners saw the chance to sell out at the top of a record-breaking bull market. The replacement of this highly intelligent management by the clunkers who bought the two operations is itself a sign that the Worthington girl should choose some other line of work. Nobody wants to work for idiots.
The money is also not what it was. Traditionally, only a small part of an investment banker's earnings came from base salary, with the bonanza coming from bonus. Of course, this made the bonus allocation process inexpressibly opaque and political, during which gentlemen (and ladies) were at a huge disadvantage compared to sleaze balls. However, in a perpetual bull market, the absolute bonus sizes were large enough to assuage any resentment at others' greater share of the loot.
In a down market, with most trading operations at or below break-even, bonuses disappear. Interestingly, even base salaries, never particularly elevated, have shown a tendency to diminish as the bear market has worn on. Oddly, the requirement to work an 80-hour week, which one would have expected to diminish with lower business volume, has not done so; instead, investment bankers struggle with increasing desperation to gain the crumbs of business that are left.
Suddenly, the banker has other alternatives, paying similar money, that do not require 80-hour weeks, and that do not leave him unemployed before 40. The exodus from the industry, therefore, may only partly be forced by headcount reduction; the best bankers are among the most capable of people, and have numerous alternative employment avenues once they start to look for them.
Outside the investment banking and trading arena, the picture is similar, although less extreme.
Corporate commercial banking is a business whose importance has been diminishing for two decades now, although as far as headcount is concerned this has been disguised by the prevalence of very labor-intensive securitization deals. Bonuses, fat in good times, are much leaner now, and the work is intellectually un-stimulating, to say the least. Losses from securitization's "toxic waste" -- risks left behind with the scrutinizing bank after a deal is done -- may add to job insecurity in this traditionally stable field.
In consumer banking, the area of high net worth "private banking" expanded enormously during the boom, as new wealth multiplied, and is seeing a corresponding downturn in staffing and pay now. Credit card banking never paid well, and is due to be further squeezed as the consumer delinquency rate, already at record levels, starts to damage lenders to the extent that they stop doing the business.
Mortgage banking, like stock broking, is a wonderful business in a bull market, but becomes uninteresting once the market declines. Like private banking, it has been able to expand in recent years because of the flood of nouveau--riche money; its attractions will last only as long as the current housing boom.
Insurance, normally a stable if unexciting business, also became more lucrative, both for the insurers and the employees, during the long stock market boom, as insurance funds were invested in the market. Sadly, the stock market decline has left insurance companies at risk for their survival, and job losses in this area, too, have been severe.
If this bear market were to last only a year or two, then maybe Mrs. Worthington should keep banking on her list of possible careers, albeit not at the top of it. After all, her daughter, if of the right drive and personality type, must expect to experience a few years of hard grind and even unemployment if she is to enjoy the bonanza of the good years.
Sadly, as I have written elsewhere, that bonanza may be over, for a generation or more. The huge 1982-2000 increase in financial services' share of the economy appears likely to be reversed over the coming years, as the new products that have been introduced become increasingly accepted and trading margins disappear.
As Enron graphically demonstrated, much of the income that was reported from derivatives operations, for example, was a product of the bull market and funny accounting, and did not represent true economic earnings. In a bear market, risks become only too apparent, and trading teams that take on risk without adequate reward become quickly redundant.
In the 1930's, of course, a combination of heavy handed regulation, protectionism, and a lengthy slump wiped out not only the profitability but also even the operations of all but the most retail-oriented commercial banks. While Jimmy Stewart may have made an adequate living by small town banking, the wholesale banks, and still more the brokerage houses, ground to a halt as financing activity slowed to a trickle. This time, we can hopefully avoid such an outcome.
Nevertheless, financing volumes are likely to remain well down on the boom years, making the industry only marginally profitable and substantially over-manned for many years to come. With money tight, and older colleagues soured by working continual 80-hour weeks while their bills, to finance a now unaffordable lifestyle, mount higher and higher, Wall Street will be no place for a lady.
In short: "No more buts, Mrs. Worthington. Nuts, Mrs. Worthington. Don't put your daughter in a bank."
(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long '90s boom, the proportion of "sell" recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
