Long gone are the glory days of the 1990s, when huge conglomerates in towering skyscrapers performed every financial service imaginable for an endless list of clients. Even trading rooms, like those fictionalised (or not so much, apparently) in this year’s Scorsese blockbuster The Wolf of Wall Street, have scaled down, or split. In their place, or, more so, alongside such relics of the ‘era of financial excess’, have arisen a collection of independent firms providing services focusing on mergers and acquisitions (M&A), merchant banking, brokerage, and asset and wealth management. This has given market regulators simultaneous relief and bother, as the industry has diversified and adapted to the conditions shaped by the 2008 crash. Investors now have a huge variety of firms to work with, and such choice has encouraged increased productivity and the scaling back of unprofitable ‘limbs’. Hence, the rise of the boutique bank, endless lists of hedge funds, and a new business model focusing on increasingly bespoke financial services.
The (Modern) Traditional Structure
The last two decades have been dominated by a combination of huge banks, and investment advisors. One only needs to look at the skylines of New York and London around the turn of the millennium to see the familiar names (which, admittedly, still exist today, bar Lehman Brothers). The Americans brought us JP Morgan Chase, Bank of America, BNY Mellon, Wells Fargo and Citibank, themselves formed by merger after acquisition after merger over the course of more than 150 years. We Brits modernised our slightly more ancient institutions of Barclays, HSBC, Lloyds and the Royal Bank of Scotland into glossy international corporates. The Swiss chipped in with UBS and Credit Suisse; even the French with Credit Agricole, Societe Generale and BNP Paribas, and the Germans with Deutsche Bank and Commerzbank. All the above names are large retail banking houses, usually in possession of several high street banking names in their own countries (especially in the UK e.g. RBS with NatWest and Coutts, and Lloyds with TSB and Bank of Scotland) but also nurturing significant investment arms operating on international scales. [See http://wp.me/p3g0mz-3v for notes on RBS and its various subsidiaries.]
Beneath the big high street names sat (and still sit) the large advisory services and ‘specialist’ investment banks; Goldman Sachs, Morgan Stanley, Merrill Lynch (pre-Bank of America acquisition) etc, specialising in private equity and other less transparent forms of finance. They provide services mainly to institutional and high-net-worth clients, bypassing the high street, and thus also avoiding considerable unwanted media attention. The combination of these two forms of bank – the conglomerate and the investment – at the end of the twentieth century had a huge impact on international finance, which manifested most materially in the American sub-prime mortgage crisis, itself a significant cause of the global recession from 2008 onwards. The pictures of the liquidation of Lehman Brothers are not ones that bankers wish to see again anytime soon (despite continued hiring freezes and mass redundancies across the investment banking sector). Big firms worldwide had to be bailed out; most famously, Merrill Lynch by Bank of America, Citi by the US government, Lloyds and RBS by the British state, and UBS by a federacy, including both Swiss and Singaporean sovereign funds.
Increased Regulation and Flux
2008 killed this modern-traditional structure, what with the take over and bailing-out of so many institutions that had flourished in the 1990s. No longer is it considered acceptable for banks with enormous retail deposits to take on such extensive and high risk activities in other financial sectors. Whilst there had previously been few credit-related regulations in place, ‘ring-fence’ style laws have been rolled out to ensure that lenders at all levels support their investments with liquid capital. In 2019, four years after their provisional start date, Basel III regulations will come into play in Europe, the third set of non-binding ‘laws’ setting standards for bank liquidity to safeguard against operational risk. These requirements will force big lenders to adjust their tactics and structures in order to meet new values. [See http://wp.me/p3g0mz-3M for how new conditions are affecting large financial services firms, and also how the trend has spread into the energy markets.]
Whilst the biggest banks scale back, the medium-sized asset managers and small boutique firms are roaring into the market. Blackrock, founded just 26 years ago, recently became the largest firm in the world by assets under management, controlling a net worth of almost $5tn (global financial assets total $225tn according to the Economist). Elsewhere, private equity investors such as Blackstone and Bain Capital (the latter funded by partners from Mitt Romney’s alma mater Bain and Co., the consultancy), both also founded in the 1980s, have taken big chunks of business from the large, traditional financial advisors. Investors, it seems, are beginning to trust more streamlined and economical firms as the global economic recovery picks up across the Western world.
On another level, senior advisors spat out by the 2008 crash have been finding their own way back into the market, in the form of boutique hedge funds and advisory services. It became almost a trend at one point that a combination of dissatisfied investors and their old, conglomerated advisors – discontent at their take-over bosses and smaller pay packages – would leave to form their own, bespoke firms. Mayfair’s real estate market went through the roof again, as its office space (which is the most valuable in the world per square meter, ahead of downtown Manhattan and the City of London) maintained popularity with the new boutique bank image and its clients.
Statistics show exactly what the new dynamic in the financial advisory market looks like. According to Reuters, the boutique and independent banks’ share of European M&A fees was around 14% in 2000, expanding to 20% in 2005 then 22% in 2008, before rocketing to 33% in 2012. Given the traditional domination of the M&A market by bigger investment banks, such as US giants Goldman Sachs and Morgan Stanley, this is an important pivot in the financial markets.
Nobody came off well during the financial crisis and its aftermath. What can be differentiated, however, is how, and how well, certain parts of the world economy have recovered, and what the recovery has done to the modern-traditional structure of international finance. The fragility of certain institutions, proven by the mass and expensive bail-outs and acquisitions, has instilled a (moral?) force in the consumer that, for now, demands a more stable system. As the global economy machine recovers, however, it will be interesting to see how long that force lasts, and how quickly a cyclical era of excess could return to Wall Street, the City and La Defense, among other icons of capitalism.