Good Read - Investment Banks Should Be More Like Supermarkets

Investment Banks Should Be More Like Supermarkets: Matthew Lynn Commentary by Matthew Lynn Sept. 17 (Bloomberg) – Venerable, old investment banks are going into the history books. Lehman Brothers Holdings Inc. has filed for bankruptcy. Merrill Lynch & Co. has agreed to be bought by Bank of America Corp. at a knock-down price. Bear Stearns Cos. has already been rescued by JPMorgan Chase & Co. In Europe, UBS AG limps from one crisis to the next, while Commerzbank AG may end up shutting down the Dresdner Kleinwort unit it acquired as part of the purchase of Dresdner Bank AG. After the financial carnage of the past year, it is now clear that the investment-banking industry will have to change fundamentally. The easy-money days are well and truly over. The business will need to be rebuilt from the bottom up. From now on, bankers must get used to something workers in other industries have had to live with for a decade or more: living on a tight budget and continually cutting costs. There will still be investment banking after the credit crunch is long forgotten. Capital will always need to be shuffled around the world, and that is what banks do. Yet the culture of excess will have to be dumped. And the first bank that realizes that, and manages to make it work, will be the winner. For the past decade, investment banking has lived inside a bubble of extravagance. Massive bonuses were paid, regardless of merit. The fanciest real estate was rented. Everyone traveled first-class. Client expenses were lavish. Head-hunters were used to fill even routine vacancies. The trainees got paid more than mid-level executives in other jobs. Even the secretaries got two or three times the market rate for comparable positions. Dinner Bills One vignette from what now seems like a distant age illustrates the point. In 2001, Credit Suisse Group AG told its staff to limit the bill for dinners to a mere $10,000 when they celebrated deals. Maybe nobody realized that was a lot more than some people earned over several months. It certainly suggests an organization where cost control wasn’t featuring on the agenda. Anyone familiar with the way the financial markets operate could reel off a dozen similar examples. There are already signs of change. Citigroup Inc. last month told its bankers that color photocopying is banned except for presentations to clients. Blackberry usage is to be reviewed. Maybe they will soon start switching off the lights before they leave the office, too. Other banks are quietly doing the same thing. Deutsche Bank AG is cutting back on taxis, the Independent newspaper said in April. Merrill Lynch & Co., before it agreed to be bought, said it was restricting the use of private jets, the Financial Times reported in July. McKinsey Report It’s not as if there wasn’t massive scope for cost-saving. ``Certain investment banks appear to have become bloated during the good times,’’ consulting firm McKinsey & Co. said in a recent report. That’s putting it mildly. McKinsey estimated that some of the big banks could save as much as $2 billion without even firing staff. That’s a lot of money that could be put straight on the bottom line without much effort. One way would be to stop hiring consultants, although McKinsey didn’t mention that. More significantly, the banks will have to import some of the basic management skills that have been standard in just about every other industry for a decade or more. In the manufacturing, retailing and leisure businesses, executives routinely examine how they can trim costs. Maximum Value They don’t just cut back on taxi bills, or put a padlock on the stationery store. They take apart each task and ask whether it can be done cheaper – or gotten rid of entirely. They lower employment costs and fine-tune contracts to make sure the company gets maximum value for money. And they don’t spend any more on their premises than is necessary for the company to survive. It isn’t going to be easy for investment bankers to get their heads around that task. The executives in charge think the cost of doing business is about as important as who supplies the flowers for the lobby. While so much easy money flowed through the industry, they didn’t need to think otherwise. Spending is easier than saving, and it’s more fun as well. It now seems likely the financial markets will be tough for the foreseeable future. Once the dust has settled, there will still be an investment-banking industry, yet it will have to be as lean as a carmaker or a supermarket chain. It’s time they woke up to that reality. (Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)