Some on Wall Street may get extended summer break

September 8, 2010

Bankers returning from summer vacations have some reason to be happy to be back at work. After all, the momentum suggests business at something closer to normal for the rest of 2010. But markets remain choppy, and that could mean an extended, and unwanted, break for some.

The temperature wasn’t the only thing hot in August. This was a record August for new junk bond sales and the best for announced mergers and acquisitions since 1999, according to Thomson Reuters. With interest rates still low, such deal-making may well continue.

New equity issues also brought promise. The pipeline for U.S. initial public offerings almost doubled to some $75 billion after General Motors [GM.UL], Skype and Hulu led the latest pack to file or consider filing stock market debuts. That figure should increase once the almost 200 companies considering going public decide how much to raise. Throw in the backlog for IPOs abroad, follow-on deals and convertible bonds, and there’s another $330 billion of potential work.

The associated fees would be a huge boon for equity bankers. This is their slowest year since 2005 as markets wrestle with an economy teetering between recovery and a double dip. Many earlier listings are trading below their offer prices. And investors have taken a net $33 billion out of equity funds so far this year, according to Lipper. As long as that sentiment persists, it’ll be harder to get new deals out the door.

Such uncertainty could hit mergers too. Corporate boards may prefer to catch up on overdue capital investment or just hoard their cash. Junk bonds and other debt deals will dry up if economic fears predominate. That would have a knock-on effect on trading, where revenue has recently dipped.

Wall Street is accustomed to topsy-turvy markets. But with public opprobrium constraining bonuses, the likes of JPMorgan <JPM.N> and Goldman Sachs <GS.N> have limited compensation to around 40 percent of revenue. If the robust showing in August proves inauspicious, banks may find they have too small a fee pie from which too many slices will need to be cut. It might not take much of a slowdown before they soon start slashing jobs.

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