Squeezed I-banks will fight for talent in 2011

December 29, 2010

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

NEW YORK — This might seem like an unlikely time for a bidding war for investment bankers. After all, the industry’s high-paying culture is still under scrutiny from regulators and politicians. And new capital rules and economic uncertainty mean returns may be lackluster again in 2011. So why is Wall Street limbering up for a battle for talent?

Strange as it may seem, anemic earnings have much to do with it. In recent quarters, the likes of Goldman Sachs and JPMorgan’s investment bank generated a return of equity in the low teens at best — barely beating the cost of equity. That puts the onus on executives to squeeze as much from their franchises as possible.

Some of that will come from cutting costs, including ditching employees who aren’t bringing in the bacon, and from using expensive capital in smarter ways. But lower returns also mean any firm with pretensions of being a top tier player — in other words, all of them — will want the best people. And not just traders. Relationship bankers should be hot property, too. Outside Europe, the advisory and underwriting business has been fairly robust. It is also less capital-intensive.

Some firms took advantage of the crisis to lure bankers from defunct or wounded rivals. In the United States, Jefferies has been a big beneficiary, as have boutique advisory firms. Morgan Stanley has hired around 400 traders over the past 12 months. But the so-called “burning platforms” like Bank of America Merrill Lynch, Citigroup, UBS and RBS have largely recovered and are expanding again.

What’s more, many bankers have far less skin in the game than before the crisis. Stock grants made in the boom have either mostly vested or are still out of the money. Much of the equity awarded in last year’s bonus round has fallen in value.

That will embolden executives to go on the hunt. It must look like an embarrassment of potential riches for both sides. The danger, however, is that this will just drive up costs across the industry at a time when revenues are under pressure. If the bidding wars get out of hand, there could be red faces all round.

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