Top talents of the banking industry, mostly in the investment banking divisions, are starting an exodus out of the country’s big banks into smaller investment firms.
These departures come in the wake of the US government’s plans for tighter restrictions and amidst calls for limits on executive compensation for banks that received more than $5 billion in government assistance
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 Bank USA, 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.