These are grim times in the investment banking industry. After the years of plenty, highly paid bankers accustomed to earning huge bonuses from working on adrenaline-pumping deals are now sitting around, nervously wondering whether they will be the next thing to be downsized.
The pain is being felt across the world, in what is one of the few truly global industries. In New York, London and Asian centres such as Hong Kong and Tokyo, the cost-savings are coming thick and fast. Bankers have long since adjusted to the reality that bonuses are going to be sharply lower this year. Now many may not even be around at the end of the year to receive a bonus.
"We're in for a savage round of cuts," says the European head of one US investment bank. "Everybody is looking at cost-cutting." Indeed, the Swiss-owned Credit Suisse First Boston has just announced another round of job losses, with 2,000 employees to go. This followed a big shake-out at J P Morgan Chase, which is cutting 3,000 jobs. Both banks were overstaffed because they had recently completed big mergers. But even the top bulge-bracket firms that grew organically, such as Morgan Stanley and Goldman Sachs, are looking to trim staff. In the US, where the biggest job cuts have come, the Securities Industry Association reckons that about 27,000 jobs have disappeared in the financial industry since employment peaked at 200,000 last year.
Investment banking has always been a cyclical business. A number of firms lost money back in 1994 when the bond markets took a tumble. After the Russian default and financial crisis of 1998, there was another shake-out, with heavy job losses in some banks.
However, this time the pain is more widespread. The roots of the present shake-out lie in the huge over-expansion in the securities industry over the past few years, during the dotcom and technology boom. While revenues were flooding in, nobody paid too much attention to ballooning costs; and as the banks competed fiercely for talent, pay went through the roof. In the US, annual packages of between $5m and $10m became commonplace for top investment bankers; one hi-tech investment banker was reputedly hired on a guaranteed package of $100m over five years.
While the good times lasted, it seemed as though the fairy-tale party would last for ever. But the bursting of the technology and telecoms bubble in the spring of 2000 signalled the bust. Ever since, the industry has been nursing a nasty hangover.
The problem is not just financial. The credibility of the securities industry has also suffered badly as a result of the string of disastrous new issues that investment banks and their research analysts promoted during the stock-market bubble. Many of these newly floated companies have since gone bust, or their shares have fallen to a fraction of their previous value. The result has been recriminations and a string of lawsuits and congressional investigations in the US.
On top of this came 11 September and the disruption caused by the terrorist attacks on the twin towers of the World Trade Center - the heart of the New York financial district.
For an industry usually depicted as a destination for ruthlessly competitive, money-driven individuals, the terrible events in New York revealed a different, human side. Bitter rivals were suddenly to be found co-operating and helping each other. Banks lent office space and trading stations to their competitors, and those who were unaffected even opened up their back-up trading floors, known as disaster recovery units, to their competitors.
There was a feeling also that it would not be fair to take advantage of rival firms that had suffered badly in the disaster. For a brief period while banks were getting themselves back up and running, trading in the markets was conducted in an uncharacteristically gentlemanly fashion.
But if the disaster revealed an unexpected generosity of spirit among those who work in the business, it has also served to deepen the gloom. Business has declined even further. During the whole of September, for instance, there were no more than a handful of initial public offerings by companies coming to the US stock markets for the first time. Normally, September is a busy month, and investment banks are suffering from low levels of activity in other businesses, such as advising on takeovers. It means that the closing months of this year promise to be a horrendous period for the industry.
One result of the downturn in the industry is likely to be another round of mega-mergers. In recent years, there has been a spate of big deals leading to dramatic consolidation in investment banking. An industry that was once made up largely of small, discreet firms operating as partnerships has been transformed over the past couple of decades into a series of huge integrated, multinational businesses that offer a bewildering array of financial products to companies and investors.
During the good times, these big investment banks are veritable money-machines, earning huge profits as well as paying many of their top employees more in a year than most people expect to earn in a lifetime. However, the downside is that they have high overheads and need a constant flow of deals to feed the machine. So when times get tough, there is an incentive to merge into even larger combinations.
There is a long list of banks touted as potential merger candidates. Goldman Sachs, Morgan Stanley, Merrill Lynch, Deutsche Bank, Commerzbank, HSBC, J P Morgan Chase, ABN Amro, UBS Warburg, Lehman Brothers, Bear Stearns and even the exclusive Cazenove have all been mentioned as potential participants in another round of consolidation in the industry.
Much of the talk may be little more than idle speculation, and making mergers work in a people business such as the securities industry is notoriously difficult. But one of the lessons of the recent past is that the unthinkable can and does happen. As one investment banker says: "The one certainty is that there is going to be more consolidation in this industry."
Despite the current gloom, it is worth remembering that this is an industry unlike any other. Even in bad times, employees still earn salaries that are remarkable by the standards of almost any other business. And even after all the blood-letting, most of the big firms will still employ far more people than they did three or four years ago.
Furthermore, there are still areas of the business that are doing well. This year, for instance, has been a bumper year in bonds, with many firms chalking up big profits on this side of the business, helped by the sharp falls in interest rates. And the longer-term prospects for the industry, particularly in Europe, remain good.
The restructuring of Continental European industry, and the growth of pension funds and the equity culture on the Continent, mean that investment banks are assured of a rich seam of business in the years to come.
It may be a volatile, high-risk business for employees, but the investment banks are unlikely to look in vain for eager new recruits when the markets pick up again. Even if those sacked during the current downturn decide never to go back into the industry, all the signs are that thrusting young graduates looking to make their fortune will continue to flock to the high-octane world of trading and deal-making.
Peter Wilson-Smith is the editor of Financial News