The unmistakable smell of defeat is starting to rise from some of the great old beasts of Europe's f...
The unmistakable smell of defeat is starting to rise from some of the great old beasts of Europe's financial markets: through a combination of fear, resignation and exhaustion, many historic names in capitalism are getting ready to summon the priests to administer last rites.
The City of London's last remaining privately held firms, Cazenove, has announced that it was planning to go public, dumping its long-held belief that it should remain a partnership. There was always something sanctimonious about Cazenove's insistence on remaining a partnership: after all, if you don't believe companies should be publicly quoted what, other than cynicism, leads you into the stockbroking trade?
Even so, its decision to change its ownership is the culmination of one of the year's most striking trends.
So far this year, Schroders has sold itself to Citigroup for $2.1bn; Robert Fleming sold out to Chase Manhattan for $7.7bn; and ING, the Dutch bank, announced that it asked Goldman Sachs to review options for its Barings subsidiary.
Lazards, one of the finest brand names in global finance, has been plunged into debate about its ownership structure from which the chances of it emerging with its long-term independence preserved look increasingly slim. For those few small, independent investment banks that remain, the outlook looks bleak.
There is a point in most industries where a critical mass of consolidation is reached. Once a certain number of smaller players have sold out to the giants, the rest start to drop like flies.
In investment banking, that point appears to have been reached. That raises an intriguing question. Why is it, at the start of the 21st century, that the global finance industry has become convinced that only the very biggest players can survive and prosper?
There were lots of good, sound economic explanations for why industries such as oil, automobiles, or consumer electronics have come to be dominated by a handful of multinational giants. None of those reasons would seem to apply to investment banking.
The real reason is the insatiable greed of investment bankers. The salary structures, and therefore the cost structures, of most investment banks have become so weighed down by the employment costs of their employees, that they have no choice but to get bigger.
Size is dictated by neither the needs of the customer, nor by the logic of the industry, but by the egos of the people working for them. Some unexpected light was shone on the warped internal economics of modern investment banking by ING.
In a statement accompanying the announcement to review the future of Barings, the Dutch bank said: "Accelerating consolidation in the investment banking market, combined with a rapid increase in remuneration in the industry, are prompting ING to reassess the scope, breadth and organisation of its investment banking activities."
Roughly translated, that means the staff were demanding so much of the folding stuff that the bank couldn't afford to stay in the game anymore. The explanation offered by most bankers for why they need to get bigger is that so they can operate globally, and service global clients doing global deals.
But as the great lyricist Ira Gershwin once wrote, to the accompaniment of one of his brother George's magical tunes: "Blah, blah, blah, blah, blah."
None of that adds up. Certainly, a BP Amoco or a Vivendi probably needs a bank with offices around the world. Beyond that, the advantages of size evaporate. There are no economies of scale in investment banking and there are no synergies of purchasing, production or marketing to be captured. Costs don't come down just because you are bigger, nor are clients more likely to roll up at your door.
The one thing being bigger allows you to do is to finance paying even bigger salaries and bonuses, which you hope will attract more skilled bankers, who may land more big deals, which will again, you hope keep the whole show ticking over for another year.
If you land three or four mega-mergers, the fees will cover the expense. If you don't, as ING discovered, you can't meet the wage bill.
Size in investment banking is now driven by the needs of the producers, not by the needs of the consumers.
But for any organisation to be driven by the desires of its staff rather than its customers is a dangerous, often fatal, path. The old, historic players are selling because they can't afford the game anymore.
But the new owners will not find it any easier.
Matthew Lynn via the London Bloomberg newsroom
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