The feeding frenzy is over for Wall Street's wolves

Falling industry revenues and rising litigation costs have put an end to investment banking's halcyon era. Medicine has been prescribed for the sector's ills, but it is bound to be unpopular.

James Packer is set to remind us of the past excesses on Wall Street with his new TV series inspired by The Wolf of Wall Street, while the current would-be wolves on Wall Street will be looking back at the excesses of their predecessors almost with envy.

In the good old days, salaries and bonuses poured into the bank accounts of Wall Street investment bankers.  

But according to the latest analysis of the global investment banking industry by Boston Consulting, the average investment banking compensation package has fallen by 25 per cent since 2010. 

In the past, legend has it that investment bankers despised their clients because they were so easily ripped off.

These days clients know all about Wall Street and its excesses, and litigation funding has increased from 3 per cent of investment banking’s total costs in 2010 to 8 per cent in 2013.

When there were easy pickings to be collected in New York and London, all the bright business school graduates seeking their fortune scrambled to join up. Now they are more likely to go off to Google or Amazon, who are leading in internet communication. But Google has also become a massive tax-minimisation factory: the bright talent can perform the gymnastics of their predecessors not against clients, but against tax collectors.

According to Boston Consulting, total investment banking industry revenues fell by 2 percent to $227 billion in 2013, and have declined by 13 percent since 2010. In 2013, revenues in fixed income, currencies, and commodities (the largest revenue pool) fell by 16 per cent, a decline partly offset by substantial rises in equity and investment-banking division revenues. Total costs have remained fairly stable, as employee compensation and rising litigation expenses have largely offset cost reductions.

Boston says the global investment banking industry finds itself in a strategic deadlock of overcapacity and flat or falling revenues.  

Mergers have sometimes overcome similar situations in other industries, but regulation is likely to prevent such a solution in investment banking. Boston Consulting says that successful institutions will be those that focus on market share gains.

The report says that although the regulatory framework of the future has largely been set, the implementation of this structure still has quite a way to go. 

Boston Consulting prescribes unpopular medicine.

“It is time for investment banks to figure out what it means to be client-centric.

“The goal is to make relationships more holistic, leveraging greater knowledge of each client’s specific, evolving needs and bringing the full capabilities of the bank to bear.”

The idea that Wall Street and London investment bankers should think about the interests of clients goes against their tradition and deeply ingrained culture.

While the advice from Boston is unpalatable, it is, of course, true.

Meanwhile, every investment banker will record and watch James Packer’s new series to remind them of the good old days.

But also watching Packer’s Wolf of Wall Street will be US Democrat Senator Elizabeth Warren, who looks likely to challenge Hillary Clinton for the Democratic Presidential nomination (Politicians should heed the might of the ravaged middle class, April 29).

Warren has started to move towards presidential nomination by blaming Wall Street for the plight of those Americans whose incomes gave been savaged since the Global Financial Crisis.

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