Monday, November 23, 2009

Opportunities: Where Are They?

Recall a year ago at this time, when we braced for a colossal collapse of the financial system and settled into a notion that the Great Depression could repeat itself. A year later, with Lehman Brothers receding into Wall Street history, there are breaths of fresh air and hints that in banking and finance, opportunities for growth, expansion and employment exist.

Financial institutions have resumed practice and protocol in recruiting in b-schools and in hiring in mid-career positions. The big banks launched "redeployment" efforts, re-hiring into growth areas those it may have dismissed in declining units. Opportunities exist, but institutions are proceeding cautiously and carefully.

The ramping back up may not be as rapid as the ramp-down. After the dot-com collapse of the early 2000's, firms subtracted and eliminated quickly, but as soon as business and markets bounced back, they added and hired just as fast. This time, they may take baby steps first.

Many Consortium students and alumni are asking, "If things have picked up and there are hopeful signs, where then are the opportunities?"

They may exist at specific institutions. As the media note prominently, firms such as JP Morgan and Goldman Sachs are setting near records for quarterly performance (buoyed by investment-banking and trading revenues). Scattered opportunities exist in many spots at these firms. They are focused on building the "stable, sustainable" businesses (private banking, investment management, and retail banking) and supporting the businesses (investment banking and trading) that generated the incomes that put them in the headlines.

These firms are hiring at all levels, but are being careful not to overdo it. Hence, they are not about to double the number of bankers they bring on board in the next year or two.

Firms such as BofA-Merrill, UBS, and Citi are aggressively working to rebuild their brands and balance sheets. They have made progress, although they may need take the occasional, substantial asset write-down. They are presenting a confident, we-expect-to-be-around face to the marketplace, including their faces to prospective bankers. They are visible in recruiting, hiring and convincing top talent to come their way.

Others such as Morgan Stanley, Deutsche, and Credit Suisse know that in a period of recovery, they can't afford to take a back seat to peer firms. It's in the abyss of a business cycle when firms ably strategize to pounce on opportunities to take them to the top of a finance sector (mergers, equities, fixed-income, retail banking, syndicated loans, etc.). Hedge fund Citadel (even after its crisis-related trading losses) is daring to start an investment bank from scratch.

Firms like Barclays Capital and Jefferies are poised and eager to pick up trading and banking business left on the table when Lehman collapsed. BNY Mellon survived the crisis untainted, partly because it emphasizes stable, unsung businesses as securities processing, clearance, and custody. It aspires to be the industry leader in those segments.

Nonetheless, careful, methodical steps in expansion is the common theme.

What about opportunities in specific sectors, Consortium alumni and students ask?

In investment banking, many banks tend to wait out the cycle, wait for M&A to return, wait for an inevitable rebound in equity and debt underwriting. They follow historical paths. The business collapses, but it bounces back.

Others take advantage of new business in select specialties. For example, some firms are doing a brisk business in advising corporations in restructuring their debt or their organizations. Some are advising parties (creditors, debtors) in bankruptcy. Banks with financial-institution clients (FIG) are thriving by helping clients (banks) raise capital or sell assets. M&A bankers see opportunity when an industry wants to expand, but a different opportunity if that industry needs to reorganize, consolidate or reconfigure itself. Healthcare bankers are waiting in the wings, as the nation confronts healthcare reform.

In sales & trading, opportunities are fleeting, sometimes momentary. Right now, many traders and hedge funds are focusing on distressed assets (mortgages, bonds, loans, e.g.), trying to take advantage of mis-pricing of assets or assets (bankrupt companies, e.g.) that are unfairly under-valued. Fixed-income traders have been taking advantage of low interest rates all year, although some think those opportunities will dim in time.

Financial institutions took a beating last year because they took on too much risk (credit and market risks) or they didn't know how to manage it or compute it (or all of the above). Many are now hustling to beef up their risk-management units. Smaller firms are hustling to launch risk units where they hardly existed before.

Large banks are evaluating their approaches to risk-taking, their tolerance for large balance sheets, large trading exposures, or gigantic loans to large corporations. As a result, some are looking to expand businesses that are less volatile and promise stable, predictable revenues. They are prepared to trade occasional home runs for frequent singles. Private banking, asset management, cash management, securities processing and custody offer such stability, and many banks want to grow those areas. Hence, opportunity.

Other firms simply want to stick to the niche they know best. Growth and opportunity will be slow, steady, assured. This includes the banking boutiques (Lazard, Greenhill, Evercore, e.g.), the trading, dealing, market-making boutiques (Knight, ITG, MF Global, Liquidnet, e.g.), or the retail-brokerage boutiques (Raymond James, Charles Schwab, Edward Jones, TD Ameritrade, e.g.).

A year makes a difference. Most of us were too scarred or scared to even mention "opportunity." Today we dare to highlight them, but that's opportunity with baby steps.

Tracy Williams

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