"The penny dropped in 2012," a source mused. "It was the year when financiers shed the illusion that their world would come back. In fact, it might be that the years 1998 to 2007 will be viewed as the exception in banking, not the norm."
It was also scary in 2011: it looked as if tepid European growth would mean a second leg down in the global crisis. European Central Bank president Jean-Claude Trichet bumbled around. Would more banks go bankrupt? What would that do to the fragile world economy? And then onto the ECB stage strode Mario Draghi who started to lift railway bridges with his little finger. As one LTRO followed another, those who were ahead of the crowd stopped talking about the end of the euro and started buying the government bonds of the periphery countries.
However, 2012 was both calmer and more ominous a bit like the eerie stillness of a frozen lake. On the surface the healing process continued: stock markets rallied, there was no revolution in Greece and abrupt return to the drachma, Chinese growth faltered but did not collapse, the looming US fiscal cliff was ignored.
And yet the world of go-go investment banking probably changed forever. An unseemly trifecta of rigorous regulation, popular outrage and ghosts from the past made 2012 the line in the sand.
Think about Barclays, which combines all three of these factors manipulation of Libor dating back several years, popular revulsion at senior managements pay (remember Diamonds £5.75 million tax equalization payment?) and the intervention of the Bank of England to force Diamond to step down as chief executive.
It was also the year when UBS finally faced facts and drastically reduced the cost base of its investment bank. The new UBS strategy is a wake-up call for the whole industry. Others might be forced to follow suit and finally capacity might be reduced. This did not happen in 2008: Bank of America bought Merrill Lynch, Barclays bought the US investment banking business of Lehman Brothers, and JPMorgan bought Bear Stearns.
Obviously, where there was overlap there were head-count cuts. But some other firm was always hiring and there was a lot of talk about good people being able to cross the street and earn handsome pay packages. Did anyone but me notice that in 2012, feted UK corporate financier Simon Robey didnt cross the street and go to work for a competitor? He left Morgan Stanley to work for himself but retained strong links with his old firm (see my November 2012 column).
My source also pointed out that, underneath the surface, invidious financial repression is occurring. Anyone living in central London knows that inflation for everyday items is running well above 5%. I dont believe this is different in other big European cities or even New York. Yet UK base rates are rigid at a paltry 0.5%, punishing savers, and long-term government bond yields are at record lows, probably heralding a 1994-style panic retreat from this supposedly safe asset class when economic conditions improve. Oh, and by the way, does anyone have a clue how the central banks are going to wean the markets off the intoxicating crack cocaine of easy money?