Another day, another scary headline: "Banking Crisis", "110,000 City Jobs Lost". With the press thriving in its role as harbinger of the financial apocalypse, it's becoming increasingly difficult to separate truth from sensationalism. So what exactly has been going on behind the plate glass and security barriers of Canary Wharf? And what does the current downturn mean for all you budding investment bankers out there? Well the good news is all is not lost. For those considering selling your souls to a career on the Sell-Side, there are still a number of options open.
While at university, you will undoubtedly find yourself bombarded by a horde of smiling recruiters from the various household-name banks. Goldman Sachs, Deutsche Bank, Citi and J.P. Morgan: banking behemoths with a human resources army capable of recruiting all in their path. Eighteen months ago these bulge bracket banks seemed like the safest bets for a wide-eyed graduate looking to make a name for him or herself in the City. Then, one sunny day in March 2008, Bear Stearns gets bought by JPMorgan and a stalwart of the American banking system is gone without a trace. The fall of Bear sent a shockwave that has been felt throughout the entire financial network. Confidence in previously untouchable institutions has fallen rapidly. Seven months on, the domino effect is in full swing, highlighted most glaringly by the five-day collapse of Lehman Brothers and the purchase of Merrill Lynch by Bank of America. It begs the questions: who is next, why is this happening and where can a graduate turn when nowhere is a "safe" choice?
Bulge bracket banks, like Bear and Lehman, are essentially split into two distinct sections: investment banking and secondary markets. The Investment Banking Division (IBD) covers the advisory side of a bank's duties; Mergers and Acquisitions (M&A) and the Capital Markets, as well as a Corporate Advisory department, divided by sector focus. The IBD has no dealings with markets at all. Despite its title, no actual investing takes place. The Secondary Markets, however, covers the Sales, Research and, critically, the trading operations of the bank. It is here that a bank can become exposed to fluctuations in a troubled market, such as the one brought about by the American mortgage crisis.
As a result of this exposure, bulge bracket banks have been among the first to suffer catastrophic losses. With Collateralised Debt Obligations (CDOs) and Mortgage Back Securities (MBS) being traded, sold and re-sold between a network of banks, a lot of money became tied up in what have been described as "junk mortgages"; mortgages given to those with poor credit histories and other sub-prime candidates. When the levels of defaults began to grow at the end of 2006, the ensuing cash-flow problems were inevitable. The highly leveraged nature of lending and investment only served to multiply the losses faced by the top tier investment banks, who had taken risky market positions in an attempt to increase their potential returns.
The biggest hits have undoubtedly been taken by the bulge brackets with the greatest exposure to the sub-prime markets. However, not all investment banks use leveraging in their trading strategies. Smaller banks, boutiques and some of the more prudent top-tier banks have taken far less risky positions and minimised their exposure to the market. As a result, they have so far been able to escape relatively unscathed. Recently, it has been the banks which have been able to stay in business and out of the headlines which have fared best, and it is here that opportunities still exist for graduates looking for a way into the sector.
Boutique banks, so called because of their specialised nature, have weathered the financial maelstrom of the last 12 months exceptionally well. This can be primarily attributed to their lack of market presence. Boutique banks only provide an advisory service, be that in M&A or the Capital Markets. As a result, Boutiques have successfully avoided the very public downfall of their top-tier counterparts. For example, the recent sale of British Energy to EDF, the French energy company, was completed with the aid of the boutique investment bank, Gleacher Shacklock.
In a world where size really does matter, the "small but perfectly formed" nature of boutiques can cause problems for job-seekers. They usually don't have the resources for a large campus presence, and are therefore often missed by the majority of candidates interested in a career in finance. While I could not argue that one type of bank is better than the other, there are fundamental differences between the larger and the smaller, and it is important that a potential banker-in-the-making do their homework before making their choice. While the bulge brackets still dominate in terms of size, graduates are starting to turn their heads in greater numbers towards some of the lesser-knows players in the banking sector.
Greenhill & Co, a London based Boutique investment bank, are looking to recruit 5 new analysts this year. As they don't have an on-campus presence they generally advertise using university careers websites, or through recruitment agencies. They are a smaller firm, so they aren't able to offer a dedicated training service. Instead, their new recruits will be expected to learn on the job, gaining hands on experience and being given greater responsibility more quickly than their bulge bracket counterparts. The office at Greenhill only contains around 60 people, meaning that analysts work in closer contact with their peers, as well as having a greater amount of contact with their managers. Although the analysts at Greenhill are still expected to put in the hours associated with investment banking, it's also fair to say that the lifestyle can be slightly more forgiving than that of an investment bank.
Despite their size, boutique banks are capable of offering young graduates an exciting and involving career. Whilst the bulge brackets are seemingly falling apart at the seams, and the fundamentals of the entire financial system are being questioned, it is more important than ever to think carefully about exactly what you want from your first job, and where you want it to take you.
Of course, in all this talk of job losses, it is easy to forget that what the investment banks desperately need is fresh, young, exceptionally bright talent to help pick them up out of their slump. Although internships and graduate schemes may be a little thin on the ground for the coming months, that isn't to say that there will be a complete hiring freeze across the board. Of course, if you were thinking of applying for an internship at Lehman Brothers, you may have to learn to live with your disappointment, but, given the different options available, it should still be possible for graduates to find a place in the system.