Big banks are adding employees for the first time in two years, according to the New York State Department of Labor. The New York City area added 6,800 jobs within the financial industry during the three-month March-May period, the biggest three-month hiring boost since 2008.

Wall Street Banks Adding to Rosters

Some of the biggest banks in America — JP Morgan Chase, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley — all increased their total numbers of employees in the first quarter of 2010. The banks made $16.2 billion combined in the first quarter, their strongest combined profit since mid-2007.

With so much success in the face of financial regulation and an economic downturn, banks aren’t just hiring, they’re paying premiums to steal talent from their competitors. Some firms are paying 30% to 40% more than market price to coax employees over from competitors. Despite government limits to derivatives trading, equity derivatives and commodities trading were two of the fastest-growing occupations, according to an Options Group survey.

The end of February represented the bottoming out of the New York City financial job market, as the industry hit its lowest employment total of the past 20 years. The number of financial advisers continued to decrease in early 2010.

Government to Oversee Pay

New financial regulations ensure the government will have the right to more closely monitor the amount banks pay their employees.

The new financial regulation agreed upon last week by Congress is expected to add a provision that gives the Federal Reserve the power to oversee the payment plans of financial institutions. If a bank’s compensation plan is considered risky by the Fed it can be punished. And it’s not just executive pay that’s being monitored — the Fed can evaluate payment of staff down to mid-level employees such as brokers and traders.

Misleading Investors

Similar to the fraud charges brought against Goldman Sachs last month, the investigation into Morgan Stanley will look at the representation of its investement pools known as collateralized debt obligations, or CDOs. Some traders say that, like Goldman Sachs, Morgan Stanley often hedged against these securities, betting that their own CDOs would fail.

According to the Wall Street Journal, which cited unnamed sources, these transactions were named after presidents Buchanan and Jackson, and were often referred to as the “dead president” deals, according to sources.

No Official Charges Yet

While the Journal reported Wednesday that federal prosecutors were looking into the case, Morgan Stanley stated that they have not received any notice from the Justice Department that there will be an investigation.

If Morgan Stanley does undergo an investigation, it will be the second major financial institution investigated this year for CDO-related fraud. Many Morgan Stanley investors are worried that the wave of investigations started with Goldman Sachs may continue to roll down Wall Street, bringing with it civil suits that could lead to market hits like that taken by Goldman in the past few weeks.

Already, the unofficial news has caused Morgan Stanley shares to drop nearly 5% this morning, down to $27.

Top Advisors See Modest Gains

Morgan Stanley made it out of 2009 as the biggest M&A advisor, beating out Goldman Sachs for the first time since 2000. However, overall Wall Street advisors suffered in the M&A department, posting their lowest earnings since 2005.

Mergers and acquisitions are an important indicator of confidence in the economy, as companies are wary to make the leap and buy a company if they are unsure about the future stability of the market.

With Berkshire Hathaway and Exxon leading the charge, we could see a rise in M&A activity in the new year. However, smaller companies may still take a less risky stance until it becomes clear that the risks taken by these larger companies have paid off.

About the Report

Morgan Stanley tackled the mobile web as a follow up to its 1995 “Internet Report,” and to try and gain some insight into what the future may look like for what they say “may be the biggest technology trend ever.” By doing this they hope to contribute to the conversation and make everyone more informed in the ways they think about mobile internet technology in the upcoming years.

Morgan Stanley Report 2009

Massive Market Growth

The report emphasized the importance of Apple in the development of mobile web technology, saying that the “iPhone/iTouch/iTunes ecosystem may prove to be the fastest-ramping and most disruptive technology product/service launch the world has ever seen.”

The presentation was broken into 8 major themes. Each of these themes touched on an aspect of the global mobile internet market, and reasons for its rampant growth. One of the most astounding statements to come out of the report is that Morgan Stanley expects the mobile internet to be at least twice the size of the desktop internet market boom of the early 1990′s. They attribute this to the smaller size, ease of use and lower price of mobile web devices.

Converging Trends

The report discusses how 5 major trends (3G, Video, ViOP Calls, Social Networking, Impressive Mobile Devices) are currently coming together to make mobile internet ramp up even faster than desktop internet did. The combination of smaller handheld devices which can access wireless internet networks that are becoming available in more and more location, allow such trends as user based video like YouTube, social networking like Facebook or Twitter, and internet calling like Skype to grow exponentially. Social networks especially drive the growth of the mobile internet market, and the more it expands, the more important these networks become.

Apple is Main Player, But Google May Be Close Behind

Currently, Apple is cleaning up in mobile web, but the report suggests that Google’s Android platform may be gaining ground. The report attributes Apple’s success to its integrated ecosystem of iPhone and the iTunes App Store, as well as its innovative devices. However, Google may be a threat, with its open source applications and by being offered on a wider variety of 3rd party devices.

The report gives some interesting insights into the future of the mobile web market, which is sure to continue to be one of the most important and innovative technological fields of our time.

For more information, you can find the complete report online at the Morgan Stanley website.

Risk

The FSB

This year, the G-20, a group of the 20 most influential economic nations in the world, discussed this very issue, and came up with the Financial Stability Board (FSB), which would act as a global forum to promote financial stability and protect against the global spread of systemic risk in financial institutions.

Recently, this group has created a list of thirty international financial institutions that are seen as international institutions which could pose a systemic risk to the world economy. While the list is not public, it is relatively easy to determine which large financial institutions with cross-border activity are the ones with the most influence on the global economy.

According to the Financial Times, the US banks on this list are:

• Goldman Sachs

• JP Morgan Chase

• Morgan Stanley

• Bank of America-Merrill Lynch

International Regulation

Of course, as with any international regulatory commission, the FSB does not have any formal means of enforcing its policies, and will most likely rely on consensus through treaties or simply function as an advisory body for the International Monetary Fund (IMF).

This month, the FSB has asked that the 30 banks on the list write “living wills” that will be documents which outline what actions will be taken by the bank if it were to find itself in a crisis type situation. They also have agreed to set up supervisory colleges that will consist of regulators from each country where one of these banks is based, in order to better supervise the process.

Some institutions have complained that it is impossible to write this kind of document without knowing the details of what the future crisis would be, as there are too many possible scenarios and solutions that could occur.

Wall Street Bull

Financial Advisers Gain

This is good news for independent advisers however, as they stand to gain about $50 billion in assets this year. On the other hand, full service brokerages will lose about $180 billion in assets. According to Charles Geisst, a finance professor at Manhattan College in New York, brokerage firms need to move to fee-based compensation entirely or else investors will continue to be sold a wide range of investments. These products may be stock issues, annuities or mutual funds.

According to Geisst, independent advisers at brokerage firms are targeting customers who have at least $500,000 in invest-able assets. They primarily focus on investment advice and also branch into advice including insurance and estate planning. Their compensation comes from fees and commissions. The Securities and Exchange Commission regulates financial advisers that are registered and their services can range from tax planning to retirement savings.

According to Discovery Database, a sales and marketing firm in New Jersey, Merrill Lynch recruited 96 advisers last month and Morgan Stanley Smith Barney added 54 advisers. Bank of America is also adding advisers and hoping that assets and clients will follow as well. Bank of America even started a $20 million campaign to ‘revive ’ Merrill Lynch’s bull logo and attract potential clients. Other firms have also set up some incentives for investors. For example, Charles Schwab and Fidelity are reimbursing transfer fees and offering some commission-free trades to new clients who set up portfolios through an adviser. At many of the bigger brokerages, top advisers are receiving retention bonuses so that they do not leave (and so their clients will stay as well).

Some Clients Stay

Even though some firms that offer a more customized approach can boast about clients switching over, not all clients will move. Charles Schwab has gained $29 billion in net new assets over the last three quarters and net inflows increased 44 percent in the third quarter from the previous quarter. According to James Wiggins, a spokesman for Morgan Stanley, $1.5 trillion in client assets demonstrates they (Morgan Stanley Smith Barney) are serving their clients well. You should also note that full-service brokerage firms hold more than half of the $8 trillion in client assets. With figures such as these it may look like full-service brokerage firms are losing clients, but they are not down and out yet.

From the Treasury’s $700 billion bailout package, financial institutions received $228.6 billion. The 10 banks that failed the stress test were also told they need to raise an additional $75 billion as a buffer for possible shocks in the economy. Since then, these banks have been rushing to raise the amount through share swaps and other financial maneuvers.

Financial organizations that received a part of the bailout money have chafed against some of the limits imposed on them. Most notable, these organizations want to get rid of the limits on executive compensation.

Combined with repayments received to date from other institutions, Treasury will have received approximately $70 billion in repayments from CPP participants. More than 600 banks across the country have participated in the CPP, representing $199 billion in investments.

“These repayments are an encouraging sign of financial repair, but we still have work to do,” said Secretary Tim Geithner.

Among the banks that intend to repay some part of the bailout fund include JPMorgan Chase, Morgan Stanley, Goldman Sachs, Bank of New York Mellon Corp., Capital One Financial Corp. and American Express Co. and few more. Together, they applied to pay back $68 billion.

The roster of the executives jumping ship from the bailed out banks include some of biggest names in the financial scene. Topping the list is investment banker Byron Trott who made headlines late last month when he announced his decision to leave banking giant Morgan Stanley and form his own merchant banking firm.

Byron Trott is best known as the deal maker and trusted adviser of investor billionaire Warren Buffet. With Buffet supporting Trott’s move, Morgan Stanley is likely to see itself sharing Buffet’s Berkshire Hathaway business with Trott’s new firm.

Other top bankers from Goldman Sachs, Morgan Stanley, Citigroup, and Bank of America have left as well.

While these would have major impact on the affects banks and cause disruption in their operations, financial analysts see this as a positive development towards the stability and restructuring of the banking industry as we know it now, which has been dominated by only a handful of players for too long.

Matthew Richardson, professor of finance at the Stern School of Business at New York University puts it this way, “If the risk-taking spreads out to these smaller institutions, it is no longer a systemic threat.”

For many of these bankers heading for the nearest exit, the main issues are money and opportunity. Seeing a drastic reshaping of the once-mighty Wall Street, they are joining smaller and more aggressive investment firms that are in turn, dangling hefty compensation and bonus packages to attract them. Still, others have made the decision to leave because of culture clashes in merging banks, specifically in Bank of America’s acquisition of Merrill Lynch.

For 2008, the big banks released a total of $18 billion in bonuses and retention payments, a 44% decline from the previous year’s payouts, and a huge disappointment as far as investment managers are concerned. Despite the significant decrease however, government officials and the public were indignant that bonuses were given out at all.

Considering that they had to be bailed out by billions of taxpayers’ money, plus the fact that analysts have long named the financial sector as largely responsible for the current recession, the government is out to put the pressure on these banks.

Apparently, many of the executives couldn’t take the heat, taking leave to boutique firms, creating investment firms themselves, or joining foreign banks which declined bailout money.

Start-up financial services companies and advisory boutiques have mushroomed lately, taking over the brisk profit-taking business that defined Wall Street before. Since the summer of 2007, hundreds of bankers have been welcomed into these smaller financial services institutions. What the big banks lost due to forced layoffs and the emerging crisis, these smaller firms gained – and not just in the know-how and experience of the bankers, but in the accounts and profits that they bring with them too.
With this latest exodus out of Wall Street of not just laid-off employees but even the top-level bankers, smaller institutions are looking to lure not only the second-liners but the cream of the crop as well.

To prevent a repeat of the same fate as that of their previous three competitors, both banks made the decision to shift from being purely investment banks to bank holding companies, marking the death of the era of investment banking. Gone are the days of high leverage, lucrative returns and $50 million bonuses for company executives.

By subjecting themselves to the oversight of the Federal Reserve, both banks are now expected to exercise more prudence like traditional banks, and less risk-taking, while also being able to gain access to the Fed’s discount window, and accept deposits from retail customers.

The abrupt reinvention of the way they do business may be a relatively painful process for the two financial institutions and taking a quick look at their respective facts and figures might give the public an idea as to which bank is better prepared to deal with the fast-changing financial landscape.
The Figures for Year 2008

Goldman Sachs

For the first time ever since going public, Goldman suffered a loss for its fiscal fourth quarter, reporting a $2.1 billion loss, or $4.97 per share. For the same period a year ago, the company reported a $7.01 earning per share.
Even looking at full-year results, the effects of the current crisis still show. For the fiscal year 2008, the firm reported total earnings of $2.32 billion, down from 2007’s $11.6 billion and its lowest reported income since 2002. In the same way, its revenues which totaled $22.2 billion showed a 52 percent dip from the previous year’s $46 billion.
Morgan Stanley

Morgan Stanley ended the year in no better shape. The company reported a fourth quarter loss of $2.36 billion, or $2.34 per share. On the upside, the current loss was way less than 2007’s fourth quarter loss of $3.6 billion or $3.61 a share, when the company had the bulk of its mortgage write-offs.
Taking the whole year into account, Morgan Stanley still ended on a positive note, reporting total earnings for 2008 of $1.59 billion, or $1.54 per share. This figure however, is down from a $3.14 billion or $3.13 a share, in 2007.
A Year Sans Bonuses

Owing to the dismal showing of stocks and drastically reduced revenues for the past year, top executives of both financial institutions have willingly foregone bonuses. This was seen as a welcome move considering the billions of dollars worth of taxpayers’ money that the Fed earlier injected into these banks.

Goldman Sachs was the first to announce its “no bonuses” decision for CEO Lloyd Blankfein and 6 other executives. As for Morgan Stanley, this would be the second straight year that CEO John Mack would be doing this, together with the bank’s two co-presidents.

Deposit Base and Network

Goldman Sachs

Even before the change to bank holding company, Goldman Sachs already had two deposit-taking subsidiaries, Goldman Sachs Bank USA in Salt Lake City, and Goldman Sachs Bank Europe PLC. The two make up for about $20 billion in deposits spread out across both continents.

With plans underway of building up the bank’s assets from $20 billion to $150 billion and further growing deposits through acquisitions, it would become the fourth-largest bank holding company in the U.S following Bank of America, JP Morgan Chase, and Citigroup.

Morgan Stanley

Morgan Stanley Bank, the firm’s industrial bank based in Utah, will be converted to a national bank. The parent company Morgan Stanley has declared that as of August last year, its deposit-taking arm has already about $36 billion in bank deposits in over 3 million retail accounts.
Last October, Morgan Stanley sold 21% of the company in a $9 billion deal to Mitsubishi UFJ Financial Group, Japan’s largest financial company and the world’s second largest bank holding company which holds over $1.1 trillion in bank deposits. In doing so, the bank has joined forces with a strategic partner and has solidified its position in the financial industry.
Morgan Stanley is planning to use its extensive retail presence into growing its banking operations. The firm operates in 33 countries around the world, running 600 brokerage offices, with an approximate employee workforce of over 45,000.

Strategies

In order to shore up more retailer deposits, financial analysts perceive that the next logical step that these two erstwhile investment banks are going to take is to look into acquiring regional banks which could definitely give a boost to their consumer banking franchises.

With more banks expected to face more financial troubles in view of the current credit crisis, even some of the country’s bigger banks and thrifts, both Goldman Sachs and Morgan Stanley will have more opportunities to bulk up at relatively cheaper acquisition costs.

“Today we are taking decisive actions to protect the US economy. We regret having to take these actions. Today’s actions are not what we ever wanted to do – but today’s actions are what we must do to restore confidence to our financial system.” – said Secretary Henry M. Paulson, Jr.

Nine large financial organizations have already indicated their intention to subscribe to the facility in an aggregate amount of $125 billion, moving quickly and collectively to signal the importance of the program for the system. These healthy institutions have voluntarily agreed to participate on the same terms that will be available to small and medium-sized banks and thrifts across the nation.

The banks include:

Bank Of America – $25 Billion

Citigroup – $25 Billion

JPMorgan Chase – $25 Billion

Wells Fargo – $25 Billion

Goldman Sachs – $10 Billion

Morgan Stanley – $10 Billion

Bank Of New York – $2-3 Billion

State Street – $2-3 Billion

“We are acting with unprecedented speed taking unprecedented measures that we never thought would be necessary. But they are necessary to get our economy back on an even keel, and secure the confidence and future of our markets, our economy and the economic well-being of all Americans.” – said Secretary Henry M. Paulson, Jr.

G-7 Finance Ministers and Central Bank Governors Plan of Action:

“Over the past year, the Federal Reserve has actively used all its powers and authorities to try to help our economy through this difficult time…. The actions today are aimed at restoring confidence in our institutions and markets and repairing their capacity to meet the credit needs of American households and businesses”. – Federal Reserve Chairman Ben Bernanke, October 14, 2008

Britain and other European governments have already launched similar efforts to nationalize their banks.