The greatest global financial crisis since the Great Depression was triggered in 2008 by multiple factors including the collapse of the subprime mortgage market, poor underwriting practices, overly complex financial instruments, as well as deregulation, poor regulation, and in some cases a complete lack of regulation. The crisis led to a prolonged economic recession, and the collapse of major financial institutions, including Lehman Brothers and AIG.
Perhaps the most substantial piece of legislation that emerged from the crisis is the Dodd-Frank Act, a bill that sought to improve the regulatory blind spots that contributed to the crisis, by increasing capital requirements as well as bringing hedge funds, private equity firms, and other investment firms considered to be part of a minimally regulated “shadow banking system.”
Such entities raise capital and invest much like banks but escaped regulation which enabled them to over-leverage and exacerbated system-wide contagion. The jury is still out on Dodd-Frank’s efficacy, and the Act has been heavily criticized by both those who argue for more regulation and those who believe it will stifle growth.
Investment Banks Like Goldman Converted to BHCS
“Pure” investment banks like Goldman Sachs and Morgan Stanley traditionally benefited from less government regulation and no capital requirement than their full service peers like UBS, Credit Suisse, and Citi.
During the financial crisis, however, the pure investment banks had to transform themselves to bank holding companies (BHC) to get government bailout money. The flip-side is that the BHC status now subjects them to the additional oversight.
Industry Prospects After the Crisis
Investment banking advisory fees in 2010 were $84 billion globally, the highest level since 2007, while 2011 saw a significant decline in fees.
The future of the industry is a highly debated topic. There is no question that the financial services industry is going through something pretty significant post-crisis. Many banks had near-death experiences in 2008 and 2009, and remain hobbled. 2011 saw much lower profitability for many of the largest financial institutions. This directly impacts bonuses for even the entry level investment banker, with some pointing to smaller fractions of ivy league graduating classes going into finance as a harbinger of a fundamental shift.
That being said, those trying to break into the industry will find that compensation is still high compared to other career opportunities. Also, the job function of an M&A professional has not dramatically changed, so the professional development opportunities haven’t changed.