Investment banks are entering a tricky time as the economy slows and deals dry up. Goldman Sachs’ latest earnings showed an increase of just 3% on the same quarter in 1999, a far cry from the double-digit increases of recent years. And for the second quarter in a row Morgan Stanley Dean Witter missed the analysts’ earnings consensus. Last time it was by eight cents, half of that coming from a $45 million loss in its high-yield business, a fact which annoyed investors as the firm appeared determined to conceal it. This quarter, it was 23 cents off, which it put down to increased compensation costs, losses in equity investments, and lower underwriting and trading volumes.
If these two are suffering, the rest must surely be hurting. ING, of course, is selling off the US division of ING Barings, and Prudential Securities, having pulled out of trading US government bonds in late summer, announced in December that it would be closing its investment bank down, bar a few bankers and the research department
JP Morgan Chase has also hit trouble. Some of it is part of the industry-wide problem. Chase has mounting bad loans on its books, is having to reassess downwards it Chase Capital Partners’ investments and has seen its trading drop. JP Morgan likewise is suffering from a fall in investment-banking revenues.
But the merger itself is the biggest problem. With so many different egos and cultures to mesh together from its various acquisitions of the last 15 months, Chase appears to have taken its eye off the ball, and dropped it.
Chase CEO Bill Harrison said the deal with Morgan was not about cutting costs but he has had to revise upwards the costs it needs to cut to keep the merger on track for the shareholders. Now 5000 staff, not 3200, are to be shed, a more than 50% increase.
But the real horror story is at Credit Suisse First Boston. There’s a real danger the firm has wasted over $13 billion buying Donaldson Lufkin and Jenrette, a class-act, if a smaller investment bank. The cultures don’t fit at all and hundreds of DLJers have left, including many of the most senior bankers in M&A, high-yield debt and equities that ought to have been crucial to the merger’s success. The only successes from this merger are at other banks: Lehman, Salomon Smith Barney and Deutsche Bank have all reaped the benefits of disaffected DLJers. And all this has happened even before bonuses get paid. February will be even messier at CSFB.
