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Morning Coffee: JPMorgan’s “biggest job cuts for years” are still small. McKinsey & Co's layoffs are pragmatically savage

Investment bankers in Greater China have had, it’s fair to say, a pretty miserable few years.  Even the good times in terms of revenues were hard to enjoy given the rigorous COVID lockdowns and a tough political situation.  And the 2022 bonus season was … not good.

And now, adding to their woes, the job cuts have begun.  JPMorgan is the latest to announce, with cuts in Hong Kong and China, affecting bankers with both a regional and China-focused remit.  One thing after another.

Except … there really aren’t very many of them.  The cuts could be described as “the biggest reductions seen in years”, or “nearly 5% of the investment banking headcount in the region”, but they could also be described as “30 bankers, most of them at junior levels”.  Thirty people across a number of offices is barely a course correction; it’s only the biggest such move for years because it’s been so long since there were any major redundancy programs in the region.

China is different, when it comes to investment banking personnel decisions.  It’s seen by all the big firms as a long term growth market, and that gives it a certain degree of insulation against the industry cycle.  It’s a market that requires banks to show a bit of commitment; the perception is that you can’t build the relationships on which a franchise is based if you’re only there for the good times and disappear when the market turns bad.

Of course, what’s true of China is arguably true of every investment banking market.  The biggest driver of long term success is long term stability of personnel, and the biggest destroyer of franchises is the over-aggressive use of RiFs as a way to manage the business cycle. 

Markets which turn down have a habit of turning back up again.  When they do, firms that cut too far and too fast end up scrambling to staff up again, usually paying over the odds to do so and setting up a cost base which will make things look even worse in the next cycle.  Meanwhile, the bankers who weren’t cut will have spent the lean years continuing to build and strengthen their relationships in an environment of reduced competition.

All of which means that if you really need to make cuts in investment banking, there’s no middle ground.  Either you close down offices, get rid of sector teams, shut down trading desks and accept that you might never get back into those revenue lines.  Or you use the cycle to make more or less marginal shifts in emphasis; a hiring freeze combined with a performance-related cull, or a rightsizing of bankers who aren’t directly producing revenue.

The biggest source of competitive advantage in the long term for the big US banks remains their ability and willingness to endure short term pain for longer term gains.

Elsewhere, but on a similar theme, McKinsey (a consultancy which has been known to suggest drastic staff reduction plans on occasion) is carrying out “Project Magnolia”, which will aim to cut 2,000 jobs.  This too is not a huge reduction in percentage terms (it’s 4.4% of the current headcount of 45,000, which needs to be seen in the context of the fact that this has grown from 28,000 over the last five years).  But it's highly targeted at the bottom of the food chain. The redundancies are going to be concentrated on “support staff in roles that don’t have direct contact with clients”; McKinsey is apparently still hiring professionals who are capable of directly generating revenue.

According to “people with knowledge of the matter”, the main purpose of the layoffs is to “preserve the compensation pool for its partners”.  Of course, given McKinsey’s structure, this is really just the same thing as preserving profit for shareholders, but it sounds more brutal when you put it that way.  There are two key lessons – first, that when you’re working for a partnership, every cent that you earn is money that a partner feels like they could have had.  And second, that the only source of employment safety is to have revenue attached to your name.

Meanwhile …

“Notwithstanding challenging macroeconomic and geopolitical developments, under Ms Fraser’s leadership Citi made solid progress on each of our priorities, and the compensation committee recognises the strategic direction that took shape during 2022”.  Jane Fraser of Citigroup got a $23m bonus for 2022, taking her total comp to $24.5m which is up 8.9% on last year and makes her one of the few Wall Street CEOs not to see a pay cut. (FT)

It's important for top management to project optimism and to put the best face on things, but it’s also important to make sure that all public communication is clear.  Credit Suisse Chairman Axel Lehmann is being investigated by the regulator over comments made about client money outflows late last year. (Finews)

Volkswagen is trying to make its employees feel less anxious about the transition to electric cars by locking them in escape rooms, a management technique that will surely be adopted by at least one big bank. (Bloomberg)

HSBC is “developing more resources” in the Middle East according to an interview with CEO Noel Quinn.  Guy Guyett (head of global banking and markets) puts it less formally – in Saudi Arabia at least, he said HSBC is hiring “as fast as it can”. (Financial News)

Consultancy is a reasonable industry, but how about “insultancy”?  That’s the term used by sustainability expert Ed Gillespie to describe the strongly worded advice that he gives to clients.  (FT)

One to ponder during the bleary-eyed morning meetings of winter – a study of university students has shown that impaired sleep tended to be associated with much worse performance (Nature)

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AUTHORDaniel Davies Insider Comment

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