Catastrophic Meltdown or Temporary Squall?

The press is full of news concerning the banking industry's current woes. What exercises the minds of bank staff and the rest of society concerns any potential impact from these events and how long such an impact might be felt.

Nothing focuses the mind more than impending death. Second on the list is probably the loss of one's job, given that our lifestyle and aspirations hinges on the ability to continue to bank a healthy salary and bonuses.

So what should bank staff make of all this?

As a recruiter, I take a keen interest in these developments since I specialise in placing people in the banking and financial services industry. The well being of my company depends on a healthy banking sector.

Now, the recruitment business (and I reserve these comments for the legitimate firms that conduct themselves ethically and responsibly, not the infamous 'cowboys' with their dubious tactics and propensity to cajole hesitant candidates into unsuitable vacancies and enthusiasm to 'churn' business by serupticiously poaching from clients and pitching to fill the ensuing vacancy) is seasonal by nature whilst at the same time being subject to the business cycle of the industry it serves.

Simply put, there are traditional 'quiet periods' when clients are pre-occupied with other personal priorities and so recruitment is put on the back burner.  For example, the summer school holiday season from the beginning of August to mid September and the 'silly season' in the build up to Christmas and the post Christmas hangover.

Similarly, recruitment can be dependent on the 'business plan cycle', where recruitment decisions can often be deferred pending the drafting and approval of the plan for the coming year.

This leaves recruitment 'hotspots' from mid February to the end of July and mid September to the end of November.

Banking has hitherto been a healthy market for recruiters, with good growth characteristics among banks, healthy profits and a constant need for expert and knowledgeable staff and senior executives. But how is this scenario likely to be affected by the reverberations currently shaking the business?  

Alongside the astonishing announcements of write downs of billions of dollars in asset values a quarter (after the first announcement, a billion loses its shock factor and the fact that it is a quarterly hit barely registers) came the inevitable casualties among the amply rewarded CEOs and division heads (comforted by generous payoffs) and the announcement of tens of thousands of staff cuts worldwide (with more meagre severance packages).

There then followed even more write downs and provisions as the replacement CEOs 'kitchen sink' everything they can lay their hands on prior and repairing the damage to capital ratios by diluting shareholders equity with deeply discounted rights issues, share placements with foreign investors (recycling some of the petro billions resulting from soaring oil prices) and/or fire sales of healthy, revenue generating 'non-core' enterprises.

But....does this represent a crisis or an opportunity?  I am optimistic.


Newton only got it half right

Isaac Newton made his name by articulating some stunning basic Laws of Motion that helped define our understanding of the Universe.

Newton's First Law laid down that "Every object in a state of uniform motion tends to remain in that state of motion unless an external force is applied to it."

It seems to me this 'uniform motion' could describe most industries/activities that are leading a comfortable and relatively risk free existence, from central and local government departments through to the banking business (even if it is often described as a 'risk business') fifteen to eighteen months ago.

However, this is not healthy.  Common sense tells me that this comfortable and stable state of affairs simply leads to complacency and carelessness - the so-called 'fat and happy' state.

What banking needed was that 'external force' beloved of Newton to be applied to it to shake it out of its torpor and it got it in spades!

A lot of rubbish has been written about how what has happened could not have been avoided or foreseen, even by prudent bankers and that the good years should be balanced with the 'not-so-good' years (a euphemism if ever I heard one!).

This article is not the place to discuss that, but personally and as a bank shareholder, if at least one risk director takes the trouble to research and fully understand the business he is responsible for (E.g. the instruments that his traders are dealing with) and performs a rigorous 'what if' analysis then the world may be a happier place.

If traders behaved more responsibly (they are paid enough!) than the one quoted on the 'Here is the City' news website, who admitted he and others did not really understand the risks they were taking but nevertheless went ahead and took out "huge positions", thereby becoming "too exposed in too small a market", then so much the better.   

Nevertheless, what has happened will hurt in the short run but be healthy in the longer term. The complacent and flabby will be replaced with a leaner, hungrier, more aware industry, still taking risk but understanding it and pricing it properly from this basis of better understanding.

Inevitably, the process is cyclical and another shake up will be needed sometime in the future.

I have enough grey hairs to remember the much revered Walter Wriston averring that "no-one goes bust lending to countries" or some such ringing phrase, only to have to eat his words with massive provisions against problem country debt (another one of those delightful euphemisms!).

Newton's Third Law states that "For every action there is an equal and opposite reaction".

Now, Newton understood his motion and his laws have stood the test of time. However, they don't apply exactly to the business world.  There is a critical delay factor in business that Newton didn't have to take into account in the ideal world of Mechanics, where action and reaction is perfect and instantaneous.

So the initial reaction is in the same direction and of a similar magnitude.

The first impact on recruitment from this current major shock to the banking business started with a stuttering slowdown in the last quarter of 2007 and has developed into a virtual hiring freeze (an actual freeze for some banks) in the first quarter of 2008. This is understandable. It is difficult to lay off thousands of staff in parts of the business whilst hiring people into another part of the organisation.

We will have to wait a little while for the 'equal and opposite reaction'.  However, it will come.  There is a 'waiting list' of recruitment requirements already building up for those parts of banking not directly involved in the fixed income business or impacted by the sub-prime difficulty (these euphemisms are catching!).

As the liquidity difficulties in the global monetary system ease (and governments and central banks must ensure this happens. They have no choice, no matter how politically sensitive it may be, economic survival depends on it) then the hiring shackles will come off and the pent up demand will be released.  

CEOs will need to focus on ways of rebuilding income streams and profitability and will encourage business growth in more traditional activities that are easier to understand and measure for risk and may well be wary of the source of their current pain.  

Corporate banking, retail banking, corporate finance and advice, IT, HR and the rest will lead the way and leave the investment bankers to patch up their wounds and follow suit in their own time.


It's Just an Accounting Adjustment!

So, how does this translate for the individual who is either contemplating joining the banking industry or seeking a career enhancement move within it?

My view is that banking is still a fantastic career opportunity and that those wishing to progress their career through a job move will still be able to do this.

The difficult thing to predict is timing. Just how long will it take for the industry to get all the bad news out on the table, take all the pain in write-downs, rebuild their capital and let the more traditional parts of the business off the leash?

Fortunately, what will drive this is competition. No financial institution can afford to be left behind for long and so there will be an urgency to learn the lessons, repair the damage and win back the loyalty of their customers and the confidence of their investors.

I cannot be absolutely sure how long it will take but I am certain it will not take long.

I just hope I never again hear the complacent comment made to me over a pre-Christmas beer by the senior vice president in corporate banking with one of the largest global American banks who, in answer to my casual enquiry about whether he thought the sub-prime crisis would adversely affect his bonus, said something like "I don't think there is much to worry about these asset write downs, there is no real money involved, it's just an accounting adjustment".



Christopher J. Brayley B.Eng; MBA, an experienced ex-banker with over 25 years in corporate banking with a leading global American bank, a prominent UK clearer and as a consultant, is a senior consultant with AEGLE LTD., a specialist executive search and placement agency focused on the banking and financial services industry.