Wednesday, 21 August 2019

The generation game

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Since the onset of the financial crisis in 2008, there has been considerable flux in the leadership of the investment banking industry. The change has been considerable in terms of personnel. But has it produced a change of culture, to go with a more humble time for the industry?

Are we at the cusp of a generational shift in global investment banking? Is the industry poised to undergo a parallel cultural mutation either in the wake of evolving regulatory change or as a result of remedial work carried out by bankers in the wake of the brutal criticism of the role they played – or were perceived to have played – in the lead-up to, during and since the global financial crisis?

Let’s start with those running the investment banks. By luck or by design, it just so happens that there are a lot of new faces at the helm of the industry behemoths, with other changes set to come into effect during 2012.

There has been a quiet personnel revolution at the top of the industry since the financial crisis. During the past three years, pretty much every major global firm has either appointed a new CEO or a new head to its investment banking division. Alternatively, current heads of investment banking divisions have been given broader group-wide roles.

Goldman resists

The only global firm that has resisted the temptation to change its top management ranks since the crisis is Goldman Sachs. In the circumstances, in which Goldman was unfairly and somewhat absurdly cast as the embodiment of evil in the industry and came under all sorts of pressure to change, the firm’s immutability is extraordinary. It speaks to its unity and binding culture, which is certainly a strength, but by the same token it speaks to its imperviousness to outside influence which, given the charges levelled at it, has been seen as a serious negative.

Under chairman and CEO Lloyd Blankfein, any recent changes have been at best subtle. The inner circle remains intact. In 2011, Richard Gnodde, co-CEO of Goldman Sachs International, was additionally appointed as one of three co-heads of global investment banking (sitting alongside incumbents John S Weinberg and David Solomon). And Michael Evans, one of three vice-chairmen (along with Weinberg and Michael Sherwood, the other co-CEO of GSI) was made global head of growth markets. Gary Cohn, Blankfein’s senior lieutenant, remains president and COO.

The securities business continues to have the same four global co-heads that were appointed in March 2008: Ed Eisler, Pablo Salame, David Heller and Harvey Schwartz, all long-standing Goldman staffers.

There was talk during 2011 that Blankfein might stand down to assuage some of the fury around the firm’s perceived wrongdoing. The names that came up as potential replacements were pretty predictable: Cohn, Sherwood and Evans were front-runners. Solomon was mentioned in dispatches as a potential contender, but because he doesn’t sit on the executive committee, he was seen as the rank outsider. He was, however, the only candidate from the banking side, as opposed to the securities side of the firm.

Bankers versus traders

This latter point is interesting. It’s plausible to imagine the waning importance of trading in investment banks’ revenue mix impacting over time on culture and on management choices, but it’s too early to make a call on this. The dominating pre-eminence of FICC and equity trading in the revenue mix may have declined, but it’s unclear whether this is the result of current market conditions or a function of management endeavour to change the nature of the business on the back of regulatory efforts to reduce systemic risk.

Here’s the thing: running an investment bank just got really complicated

As long as trading had dominated earnings, traders dominated the senior management ranks of the industry while investment bankers who used to be the kingpins were relegated to being bit players. If trading continues in its current abeyant state over the cycle, it might change the direction of executive committee politics within investment banks. And given the (albeit exaggerated) popular and political backlash against the notion of casino banking as practised by traders, the pendulum could swing back in favour of bankers.

Is there any evidence of this? Not yet. Bearing in mind that each and every change at the top of the industry has been accompanied by changes to senior positions across the investment banking and trading universe, what can be gleaned from the C minus 1 and C minus 2 appointments? Have boards and executive committees taken into account the changes about to be wrought by the new regulatory framework and the emerging new world, and sought to impose real change? Not really.

Spot the difference

There’s little evidence that the new class of industry leaders is, as a group, materially different from those that went before. The reality is that for every new CEO of an investment bank or CIB division, there remains a veritable army of long-serving industry veterans underneath them representing the former status quo. Clearly, the industry can’t change everything overnight, but there is a sense that with so many entrenched interests, things will change slowly. Effecting cultural change takes years. Only to a point is the industry embracing change.

It’s interesting to look at the discussions around succession for clues here. The two most talked about situations revolve around who will replace Anshu Jain as CEO of Deutsche Bank’s CIB, and who will replace Jamie Dimon as chairman and CEO of JP Morgan Chase. Even though Dimon is expected to remain in situ for another five years, the hunt is on to find his replacement. Might we see a new-style appointment or an external appointee? Frankly, it’s extremely unlikely.

Industry watchers say that Jes Staley, JP Morgan CEO since 2009, is unlikely to succeed him, partly because he is only a year younger. There are good odds on a small group of 40-somethings. Not one comes from the investment banking side. Two front-runners are traders Matthew Zames and Daniel Pinto, global co-heads of fixed income. Pinto probably has the edge because he’s additionally co-head of the EMEA investment bank and group CEO for the region. Other candidates mentioned are Michael Cavanagh, head of Treasury & Securities Services; CFO Doug Braunstein; and head of asset management, Mary Callahan Erdoes.

As for Jain’s replacement, good money is on Michele Faissola, head of rates and commodities trading and a long-standing member of Jain’s fabled derivatives dream team that made a fortune for the bank in the years leading up to the crisis. Other contenders reportedly include Colin Fan, global head of credit trading (previously head of Asian equities); Rich Herman, global head of the institutional client group, and Alan Cloete, head of global finance. Stephan Leithner, co-head of coverage and advisory, is the only contender from the banking side, previously run by Jain’s CIB co-head Michael Cohrs before he left the bank.

Here’s the thing: running an investment bank just got really complicated. The more transparent but more complex operating environment being created combined with higher regulatory and capital costs is likely, over time, to force durable change. Given the fairly long-dated layering-in of the new regulations (out to 2019 in some cases), running an investment bank has, more than at any time in the past 25 years, also become a job for professional managers and technocrats.

Navigating the complex environment is likely to dominate the minds of the new set of industry leaders like never before. But don’t hold your breath for Street-induced change.

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