Wednesday, November 12, 2008

U.S. investment banks now at disadvantage in talent wars

The U.S. investment banks are now likely to be at a decided disadvantage in the wars for the best talent versus the foreign owned investment banks. Despite the widespread damage to the business of late, there is and will always be seats at the table for those that are best at their jobs. So why the disadvantage for the U.S. firms?

The Treasury infusion of money into the banks for non-voting preferred stock has led politicians to claim that the U.S. taxpayers are owners of these banks in a broad sense such that some Democrats in Congress are asserting the right to broadly dictate management policies to these firms. The media has propagated this myth to the extent that it is becoming a truism. That gets to the talent war issue. If politicians and the public succeed in decimating the bonus pools of American investment banking practitioners, why would the best not be attracted to Credit Suisse, Deutsche, UBS, HSBC, and Barclays.

Admittedly, the compensation of the top executives at the U.S. firms is almost indefensible, especially in light of this year's market meltdown. Cutting those back significantly is not really an issue. It will happen. The majority of the bonus pools go to traders, capital markets managers, and investment bankers, the men and women who do the work delegated to them by those at the top. The traders in general work on contractural terms that specify at least a minimum(not so minimum to the rest of us) based on a percent of their earnings for the firm. If these contracts would be breached, the lawsuits would fly. The capital markets managers and the investment bankers are rewarded on a more subjective basis, based on both the profitibility of their businesses and their importance to the firm as a whole. These bonuses will be cut but how deeply is uncertain as this plays out. One thing is certain, however, and that is that firms not under the U.S. government's auspices will have much more leeway to pay what they want to the absolute best talent this year and in the next few years. That certainly will be the perception even though how it really plays out is unknowable.

So look for some top trading and markets teams to head to Credit Suisse and Deutsche early next year, top investment banking teams to those two and UBS, top asset management teams to those three plus Barclays, and top fx and interest rate deriviatives teams to those four and HSBC. It will happen.

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