In the run-up to Christmas, I met up with three bank chief executives. This opening sounds a bit like a line from the carol The 12 days of Christmas. In that case, it would be followed by a chorus of "and a partridge in a pear tree".
I found the chiefs weary after an unexpectedly tough year. One was recovering from flu, another had suffered a nasty bout of pneumonia and the third looked shattered.
Moreover, their mood was even more downbeat than their physical health. They all expect 2012 to be difficult for the financial services industry. One fearless leader mused: "I can’t understand it, Abigail. I have people working for me earning $2 million a year and they still have debt. How are they going to manage next year if they lose their jobs?"
Job cuts were on all the chiefs’ minds. They virtually admitted to me that the cuts announced this year would be followed by much more savage culls if the good times failed to roll in the next few months.
They were all concerned about compensation, which confusingly was too much and too little at the same time. The chiefs acknowledged that industry pay must decline but insisted they needed to pay the top producers in case "they cross the street or go to a hedge fund".
I don’t share this anxiety. Things will be so bad in 2012 that good people will want to stick no matter what. Also, if equity markets are dire, I’m not sure many hedge funds will excel. Remember, the hedge fund industry sagged in 2008; investors suddenly had to learn new terms, such as gates and side-pockets.
If senior managers are sharing their pessimism with me, how cheery will they be with their underlings? I envisage a burgeoning spiral of moribund morale permeating the building.
The key issue is that few divisions are making money. One chief, who is in charge of a global investment bank with nearly 20,000 employees, said the only areas that were dependably in the black each month were European credit, foreign exchange and equity derivatives.
In addition, increased regulatory and compliance demands have added layers of non-revenue-producing box-tickers. So the industry’s dynamics are flawed at the moment.
And if you add to this more macroeconomic problems resulting in further write-downs on European government debt, we could well see big European banks nationalized. This might cause a nasty case of global contagion.
I empathize with these men at the top, but if things deteriorate this year, the crowds will bay for their blood.
Don’t let’s forget that last year most investment bank chief executives earned millions of dollars, albeit that some of this was in deferred stock. In western economies, most people away from planet banker have seen their living standards eroded by insidious inflation and limited wage increases.
No wonder a well-connected source mused: "Bank bosses are in denial. They won’t accept that the model is broken and lots of parts of the business might not make any money for the next few years. In a way, they are as much in denial as the European politicians. The European politicians won’t face up to the fact that the euro model is broken."
Investment banking is a roller-coaster ride. We all know that. There are periods of frenzied activity when the cash registers ring overtime and pallid patches when everyone runs very hard to stand still.
I expect 2012 to be tough, but there have been other tough periods for the industry. We all remember that 2008 was no picnic and the boat seemed to be shipwrecked in 2002 as the TMT balloon deflated and accounting scandals engulfed US corporates. Somehow the top financial services firms always bounce back. Goldman was founded in 1869 and JPMorgan in 1871; they’re still with us.
Is anything different this time? Perhaps. In the west, a lot of our problems are assumed to be the fault of the banks, and bankers are hated by the general public. I have tried repeatedly to work out why this is. The public don’t universally hate footballers, and footballers also earn a lot of money. It is a combination of factors.
First, most senior bankers "don’t get it" – they insist that the current mess has nothing to do with them, that they deserve huge pay-outs and continue to lead the pampered lives they have always led.
Secondly, most normal people can’t understand why senior bankers deserve so much money for performing the mundane function of oiling the wheels of capitalism. Bankers think they are enormously clever and talented. Normal people think bankers are overpaid filing clerks.
Nevertheless, there is more than a whiff of scapegoat about this anti-banker hysteria. For example, in early January, Paul Ruddock, the founder of the London-based hedge fund Lansdowne Partners, was knighted.
The popular press snarled that this was the man who had shorted the British bank Northern Rock as it lurched towards bankruptcy. Thus Ruddock had made money out of other people’s misery and at the taxpayer expense when Northern Rock had to accept government money.
The articles missed the point that although Ruddock has been a donor to the Conservative Party, he is also a very generous patron of the arts. More importantly, they missed the point that it was Northern Rock’s management that cost the taxpayers billions, not Ruddock.
I am not optimistic that bankers will become more popular in 2012. The golden fountain has been poisoned and in the next decade our children will no more aspire to be financiers than we aspired to be civil servants.
If, as 2012 unfolds, you are a banker and if this year turns out to be as bad as some commentators are predicting, what should you do?
I cast my mind back to my own career in the City, during which there were a few fallow patches. In 1987, there was the famous equity market crash. In 1994, the Federal Reserve embarked on a policy of raising interest rates. I was in debt capital markets originating bond issues and no institutional investor wanted to purchase a fixed-rate obligation that would be under water in two months’ time. In 1998, my firm lost much more than it could afford to lose when Russia defaulted and the hedge fund LTCM spiralled out of control.
