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Demise of the Asian investment
banker
By Kevin Phillips
Three
years ago, Kevin Gin was the Singapore head of research
and property analyst for a top-tier European equity
house. Today, like thousands of formerly high-flying
members of Asia's financial-
services
community, he has found another line of work. He is a
toy manufacturer.
This has happened before as
financial bubbles have popped. But this time it is
different. The feeling in the investment-banking
industry is that the fin de siecle times may be
gone for good. Where previously the downsized analyst
could retreat to his Phuket condo to lie in the sun or
go skiing in Gstadt to await the upturn, today stories
abound of them clearing their desks, heading home on
Hong Kong's Discovery Bay ferry and never being seen
again.
As Asia has experienced the systematic
retreat of the Western investment banks, the impact has
rippled far out from the financial-services world itself
to restaurants, travel agencies, top-of-the-line
clothiers, upscale car dealers and landlords. At least
eight top-tier investment banks have closed their equity
operations in Hong Kong, and the rest have pared back
their staffs. Demand in Hong Kong from the financial
community for English Schools Foundation schools now has
been taken up by children of parents in the
manufacturing sectors. Waiting lists have shrunk as
commission from transacting share orders has fallen.
Financial-community job losses across Asia
number in the thousands, the large proportion of them in
equity operations. These are jobs that once earned some
of their holders up to US$1 million a year. Nor is Asia
alone, of course. In New York, according to Fortune
magazine, average research-analyst pay, which peaked at
$1.8 million a year, has fallen by more than half, to a
still-astonishing $750,000-$800,000. Overall, 60,000
financial-industry jobs are estimated to have
disappeared in New York and London.
For Asia,
these job losses are likely to be structural. The good
times are gone for good because of the changing nature
of investment-banking profits, principally as
institutions shift from commission broking in equities
and equity capital management to trading, derivatives
and credit derivatives and bonds. Investment-banking
revenues now come principally from derivatives and
fixed-income operations.
The outlook for the
global economy is uncertain and the retail investor is
steering clear of equity markets after the mauling by
the bear of the past few years. More-sophisticated
investors are moving to hedge funds. Initial public
offering (IPO) revenues have dried up - and are
increasingly dominated by the globally leading few.
In-house trading profits have diminished with the
ravaging of stock markets, especially in Europe and the
United States.
Added to that, investment-bank
operational structures have changed. The perennial
battle that exists between fixed-income and
equity-management teams swung in favor of bonds. Many
investment banks are now managed by individuals with
trading or bond sales backgrounds. The animosity that
has existed between the two sides is rooted in part in
the counter-cyclicality of the two businesses, and in
part in the rising cult of the media analyst. The latest
crop of chief executive officers is unlikely to want to
rush back to the bloated multimillion-dollar analyst
teams too quickly.
Moreover, derivatives have
developed as an esoteric but profitable division. This
encompasses a wide-ranging collection of businesses that
allows the consumer to purchase guaranteed funds at one
end of the spectrum, to protecting large international
banks from corporate bankruptcies with credit
derivatives at the other. The credit-derivatives market
is expected to increase to $4.8 trillion by 2004 from
$1.19 trillion in 2001. That is a rise of 60 percent per
annum.
The current view seems to be that this is
a mechanism that shares risk across the market. However,
regulators are showing increasing concern that there
might be an unforeseen degree of concentration of risk
and a calamity could ensue, similar to that experienced
in the Lloyd's of London excess-of-loss insurance market
in the late 1980s that followed a series of
exceptionally large single-event losses.
The
signs that the cuts were terminal were there before the
equities bubble popped. Corporate finance, the truly big
money generated from underwriting IPOs and rights
issues, was increasingly going to a handful of
bulge-bracket firms, usually US ones. European and
smaller US houses were frozen out, forced to accept
minor positions in syndications rather than lining up at
the front of the cornucopia.
More and more
analysts were frantically competing for the attention of
investing professionals in Europe and the United States.
Stories were legion at the end of the 1990s of the
prototypical fund manager leaving his home in New Haven,
Connecticut, to pop open his IBM Thinkpad on the train
and find 1,500 e-mail messages from those seeking to
sell him stocks. That prototypical fund manager would
empty his e-mail by the time he got to Manhattan. It was
obvious that he would only read a handful, and those
from analysts he knew and trusted.
Research
reports of up to 250 pages that took six months to write
piled up in meter-high stacks in fund managers' offices.
Unless the investor knew the analyst, the reports were
often just swept off the side of the desk unread into
the waste bin.
So how was the ill-favored
sell-side analyst in Hong Kong or Bangkok or Singapore
or Seoul going to break through the chaff? Marketing
became the investment-banking mantra. Where previously
an analyst could sit in his office and formulate careful
investment arguments about the companies he covered, now
it was essential to get on to an airplane and fly
halfway around the world to meet the professional
investor he wanted to impress. The ratio of time spent
on research to time spent attempting to sell research
changed dramatically. Analysts were now way out there in
the blue, riding on a smile and a shoeshine. Quality of
research was falling significantly.
Then there
was the growing problem of credibility. Research reports
were inevitably tied to the strenuous efforts of
corporate finance departments to flog IPOs or rights
issues for companies that were never going to succeed.
Fund managers knew that. They had long since simply
discarded the "Buy" or "Sell" recommendations on
research. They looked at the numbers the analysts
provided, they searched for nuggets of information in
the gravel, they might read the front page. They turned
to their own growing research departments. Equity
research had hit the iron law of diminishing returns,
and the producers with it, even before the market crash.
So, with little prospect of a quick return to
employment, the first assumption is that now-rich equity
employees would retire to their sun-kissed villas to
spend their days golfing and sailing their yachts.
However, a few simple sums will show that reality is
likely to be somewhat different. The number of
multimillion-dollar packages that existed tended to be
directed toward those perceived by management as too
valuable to lose. They are the ones who are still
working in a diminished industry.
These lucky
few who do quit can now follow their dreams, whether
through the establishment of specialist newsletters or
as industry consultants no longer worrying about profit
forecasts or stock recommendations. For the remainder,
while salaries and bonuses were good, they fell far
short of life-changing. Even assuming an employee with
the right kind of persistence, moxie, luck and diligence
had accumulated $2 million in savings over the past few
years, this would yield a pre-tax annual income of
perhaps $60,000 given current interest rates - a figure
dwarfed by previous earnings. In Hong Kong, this has led
to a steady exodus from premium-priced apartments on
Victoria Peak to cheaper digs in Happy Valley - or a
departure from the special administrative region
altogether.
So the question arises: What is an
ex-stockbroker good for? Most of the unemployed still
need jobs. The fund-management industry is contracting
as well, so opportunities are lacking in that sphere.
Hedge funds seemed an attractive option but the
difficulty in raising an appropriate level of money to
generate a meaningful income has led to a substantial
number of closures. While a few individuals may be
capable of making the transition to derivatives or fixed
income, the majority will be forced to consider careers
outside the world of investment banks.
So
perhaps the apocryphal ex-broking New York cabbie of the
1970s will be repeated across a few Asian cities. In
Hong Kong, one top telecommunications analyst is now
writing an aerospace newsletter. Another investment
banker is contemplating a career as a private eye with
the Kroll international gumshoe agency.
As for
Kevin Gin, he sits at his desk looking out across the
Singapore harbor. While the boats await the process of
loading and unloading their various cargoes, he
contemplates the options presented to him by - model
soldiers. After he lost his job, a spell as a consultant
led him to a meeting with the founder of Stikfas, a
maker construction-based action figures that can be
posed. He became enamored with the models and put his
own money into the venture. He was appointed CEO and now
has a deal with Hasbro, the giant US toy manufacturer,
and industry awards for innovation to show for his
labors. He hopes the next step in this venture will take
him into movie and video-game tie-ins.
But while
losing his job in the cutthroat world of investment
banking has proved no hardship, he remembers the world
of finance with fondness. Absolutely.
For others
as well, the outcome has been far from satisfactory. As
another redundant Hong Kong head of equity research said
mournfully as he contemplated his new life, "I'm going
to have to get used to turning right when I get on to
the airplane." That vast, unexplored realm in the back
of the plane used to be called derisively "monkey class"
by the masters of the universe.
Kevin
Phillips is a financial analyst with experience in
the Hong Kong investment banking industry.
(©2003 Asia Times Online Co, Ltd. All rights
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