Former equities broker Philip Augar wrote a trilogy of books that charted the demise, rebirth, and then rise-and-fall of investment banks in London’s financial district. In his middle book The Greed Merchants (Portfolio, New York, 2005), Augar foresaw that three forces — securitisation, inter-firm competition in the global market for Initial Public Offerings (IPOs), and fee-based incentives — were likely to trigger further industry change. He predicted that ‘bulge bracket’ firms like Goldman Sachs were still likely to survive the turbulence of global capital markets.
For Augar, the global financial crisis (GFC) was a catalyst for changes that analysts with a conceptual background in history could already perceive. Undoubtedly, his deal-making experience in London and network of C-level interviewees also helped. In his prescience Augar rivals the more prominent and well-known American journalist and raconteur Michael Lewis.
Slate‘s Daniel Gross provides a post-GFC update on Augar’s survey of the IPO market and investment banking ‘deal flow’. Gross notes several trends: the fall of volume in equity underwriting deals; fewer IPO mega-deals with lucrative commission fees; tighter margins in Europe and Asia notably China; and the United States Federal Government also dropping fees from an average 6.5% of the deal to 2.7% in equity and warrant deals in the Troubled Asset Relief Program (TARP). Gross asks: Does this mean investment bankers are no longer Masters of the Universe and are now the financial sector’s new blue collar workers?
Not necessarily. Augar noted in 2005 that equity underwriting was the ‘meat and potatoes’ of investment banking: high-volume yet low-margin business. Michael Fleuriet echoes this view in his industry primer Investment Banking Explained (McGraw Hill, New York, 2008). For ‘bulge bracket’ firms, equity underwriting — like research — has been a ‘loss leader’ to more profitable services like securitisation, valuation, and mergers and acquisitions. IPO markets have fluctuated since the dotcom crash in April 2000 in a similar way to the Roaring ’60s boom in conglomerate buyouts, and the early 1980s investment bubbles in biotechnology, first generation videogames, and the lure of expert systems developed from artificial intelligence research. Globally, investors in the first decade of the 21st century tapped the equity growth in emerging markets to add ‘alpha’ or excess returns above the benchmark to their portfolios. A decade later markets like China have matured despite Burton Malkiel‘s concerns about IPO volatility, real estate bubbles, regulatory arbitrage and country risk. Wall Street’s concerns about TARP may also prove to be unfounded – or just a negotiation gambit to mitigate the potential class action lawsuits. The decline from 6.5% to 2.7% has a simple explanation: it’s what happens when municipal bond specialists make the decisions on fee structures rather than equity underwriters.
You’ll still get an end-of-year bonus – just a lower one and a slightly bruised ego.