2012 GIBs AlixPartners

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From Steroids to Fair PlayGlobal Investment Banking’sLong Road to Industrialization

DECEMBER 2012

© 2012 AlixPartners, LLP



Table O Contents:

INTRODUCTION: A NEW BALL GAME

BASIC TRAINING: A NEED FOR REAL RESTRUCTURING

THE OBJECT OF THE GAME: A FOCUS ON FUNDAMENTALS

FINANCIAL “STEROIDS”: THE LONG-TERM COST OF SHORT-TERM RETURNS

RUNNING THE SAME PLAYS: THE PERSISTENCE OF GIB BUSINESS MODELS

THE NUMBERS GAME: TRENDS IN PERFORMANCE

NEW RULES: RECOMMENDATIONS FOR GIBS

IN THE PENALTY BOX: GROWING WITH SCARCE RESOURCES

A NEW PLAYBOOK: 10 STEPS TOWARD INDUSTRIALIZATION

WINNING THE GAME: THE FUTURE OF INVESTMENT BANKING

1

5

10

13

17

27

33

38

43

50



From Steroids to Fair Play: GIB’s Long Road to Industrialization


1


lobal

investment

banks (GIBs)

have thrived

or years.

Over time, the industry

developed a culture that deineda new era o prosperity. Images

o the high-lying high-inance

liestyle, embodied in the ictional

character Gordon Gekko in

the movie Wall Street, came to

deine the public’s perception

o the industry. Conspicuouslysuccessul, GIBs attracted the

best and brightest rom across the

world.

Those days are over.

Since the global economic crisis,

GIBs and the bankers who runthem have been denounced in

the media as having contributed

to – i not having caused – the

largest inancial meltdown since

the Great Depression, triggering

massive government-led bailouts.

Today, the panic o the crisisyears may have subsided, but the

damage to the industry remains.

GIBs now ace several serious

threats:

• The GIB industry’s “new normal”

is marked by an overcapacity

problem – shrinking revenue

pools coupled with sub-scalecost structures;

• As some encourage a return

to Glass–Steagall-era laws, as

well the introduction o more

innovative rules and regulations,

various lines o GIB businessare likely to suer or disappear,

and investment banks that

have elected to ocus on BIS III

capital-light businesses (such

as advisory and underwriting)

are discovering that demand

may still prove elusive in theconusedly ring-enced post-

crisis GIB world;

• Amid continued scandals and

workorce reductions, GIB’s

reputational damage and

resulting reduced attractiveness(both to clients and to talent) is

harming its intangible goodwill.

GIntroduction: A New Ball Game

Cover Illustration: Opus Artz Ltd.





2

Widely considered untouchable

just a ew years ago, GIBs ace

an uncertain uture. Just look at the auto manuacturing and

commercial aviation industries,

where over the past two

decades, changes in regulatory

and operating environments

combined to render ormerly

solid businesses into perpetualwards o the bankruptcy court.

GIB’s uture could play out in

a similar manner, only without

the goodwill o a public and

government who blame the

industry or the excesses o the

pre-crisis era.

Still, the GIB industry was born

and developed to perorm

crucial global inancial unctions

that beneit the overall economy

by steering it down the most

optimal path to growth, wealth,and social wellbeing. For all o

the weaknesses they may have

shown, strong investment banks

and bankers are essential. They

must survive, but they also must

transorm.

Having abandoned, whether

by virtue or by necessity, many

o the past practices that led

to outsized short-term proits

despite unmanageable levels o risk, GIBs must now embrace a

long road to the industrialization.

They must revamp their main

lines o business and raise

ront-to-back productivity at

all levels. They must learn to

do more with less – and do itaster and more eiciently. GIBs

will need to reach out into new

revenue and proit pools, ound

mostly in middle markets and

private clients, but also in certain

alternative geographies, moving

rom “inancial” to “operational”to “commercial” leverage.

Bankers will have to chase more

clients, with production actories

and cost-to-serve structures at a

raction o previous ones. They

will need to realize considerablecost synergies by sharing/

pooling cost structures and

product/services platorms

across multiple businesses or

even among competing banks –

localizing the actories in the

“cheapest to deliver” country,stretching their “manuacturization”

as much as possible.





3

They must give up their version

o steroids—those perormance-

enhancing “drugs” o highleverage, principal investing, and

conlicts o interest—that they

had taken to such destructive

eect. Like athletes today, GIBs

that want to continue to compete

must “play air.”

A new, holist ic management

o the overall GIB value chain

is needed, with a dynamic

approach ocused directly on its

truly value-added components,

allowing some unbundling o

the business model throughopen platorms. Given the need

or a paradigm shit across the

industry, merely ocusing on

“sweet spots,” “low-hanging

ruit,” and new arbitrage

opportunities won’t suice.

CEOs will need to resist thetemptation to look or quick

ixes, and try instead to build

their uture perormance on a

more sustainable basis.

To accomplish this, we

propose 10 Steps TowardIndustrialization. GIBs that

address each o these points as

part o a larger strategic plan can

lead the way toward the uture o

their industry.





4

To impact the top line in the short to mid terms

To impact the bottom line in the short to mid

terms

To impact intangibles in the medium to long

terms

“Smart” investment banking

Mid-market extensionProactive restructuring

New intermediation corridors

Continuous innovation

Internal marketplace development

Sharing and pooling o platorms

Productivity benchmarking and revised

compensation systems

Objective strategic advice oerings

New culture and new bankers

10 STEPS TOWARD INDUSTRIALIZATION

The time or change has come.

The GIB Industrial Revolution has

begun.





5

Basic Training: A Need For Real Restructuring

A new regulatory ramework,

increasing compliance costs,

and more stringent constraints

are compounding the eects o a

low-growth economy

characterized by new and

unoreseen risks. With a 31% allin revenues, rom 2009 to date1,

the once prosperous and

powerul business o investment

banking seems to have allen

through the loor, scaring

debt-holders (with Lehman early

on and MF Global morerecently); scaring shareholders

(with targeted, sustainable ROE

collapsing rom the high

twenties to the low single

digits); and, inally, scaring

everyone, as governments and

supranational institutions couldbe called in again to save the

banks that are “too big to ail” in

order to avoid a global inancial

meltdown.

Investment-banker compensation

has also come under close

scrutiny. There is outrage at

its current levels, but GIB

compensation in the years

beore the global inancial crisis

was in act much higher. This istrue or all sta but especially or

managing directors.

Indeed, we estimate that

what GIB critics might call an

“overpayment eect” globally

was approximately $24 billionin 2007; in 2011, it was still $18

billion, or 28% o aggregate

proit beore tax2. This means

that, even though average GIB

compensation has been cut by

more than 25% in the last ive

years, the gap between GIBemployee compensation and

that o comparable workers in

other industries, such as asset

management, is still 20-30%.

1

Total estimated investment banking revenues. Source: Deutsche Bank 2 Applying the London-based inputs analyzed in table 1 to our universe o globalinvestment banks: the Top 15 players representing over 80% o the global CapitalMarkets & Investment Banking market.





6

GIB vs. Other Industries –

Front Office Roles Compensation (2011, %, Index, GIB compensation =100)

GIB vs. Other Industries –

Supporting Roles Compensation (2011, %, Index, GIB compensation =100)

Source: AlixPartners benchmarking for front office employees based in

London

Source: AlixPartners analysis on “The Michael Page Financial Services

Salary Survey”, 2012; analysis focused on Compliance and Audit roles

50

36 31

50

3839

Global InvestmentBanking

ManagementConsulting

AssetManagement

Base Bonus

100

74

73 7164 64

2721

16 15

GlobalInvestment

Banking

WealthManagement

& Funds

Insurance RetailBanking

Base Bonus

10092

80 7970

Cost Per Employee [Comprehensive also of Supporting Roles ]

(2007 – 2011, %, Index, 2007 = 100)

Wall Street Bankers’ Average Compensation[Focus on Front Office roles](2007 – 2011, %, Index, 2007 = 100)

Source: AlixPartners analysis of GIB annual reports; panel analyzed is

comprised of the following players: UBS, Credit Suisse, JP Morgan,

Barclays, RBS, Goldman Sachs, Morgan Stanley

Source: AlixPartners analysis of “Investment Banking Compensation Survey”,

Wall Street Comps 2007, 2009, 2011, based on weighted average of MD,

Senior Vice President ,Vice President, Associate roles compensation

73

100

20112007

19 26

81

36

2007 2011

Base Bonus

100

62

- 27%- 38%

- 56%

+37%

TABLE 1: GLOBAL INVESTMENT BANKING: PROFESSIONAL SOCCER REDUX





7

For many years the GIB industry

has been characterized by cost

structures that are sometimescompared to proessional

soccer – very high across the

board, and especially or the star

players. However, countering

that, successive rounds o

workorce reductions and cuts

in overall GIB compensationhave started to take eect.

We estimate a crude “15X25

rule” is being applied by the

industry –15% layos3, times

25% reductions in average

compensation, with the

noticeable exception o the Cityo London, which by the end o

2012 will apparently have lost

100,000 jobs since 20074 (a

reduction o almost 30%). And

even that may not be the end

o it.

This strategy does not, however,

mean that things are working

out. Front-to-back productivity is

depressingly low, and the return

on capital won’t be healthy any

time soon, especially as more

layers o red tape and regulation

are implemented (table 2). Even

the signiicant investments thathave been made in regions

such as Asia, on the premise

o its inevitable boom given its

substantial GDP growth, have

yet to pay o and are being

revisited in light o the structure

o the region’s industry (currentlyheavily dependent on IPOs

and equity, and still lacking a

large base o loyal, recurring

buyers o investment banking

products and services). The cost-

cutting strategy is just buying

time, protracting the slow, butinevitable, disappearance into

irrelevance o a business that

badly needs to be reinvented.

3 Based on public announcements o 10 large players in the industry4 Centre or Economics and Business Research, May 2012





8

Regulation

Country/

AreaBasel III Global

(but withnotable

“local”

exceptions) (1)

Dodd-Frank U.S.

(1) For instance in the U.K., the FSA recently informed banks that they will not be required to hold any extra capital against new U.K. loans that qualify for the “funding

for lending” scheme. In addition, U.K. banks will no longer be required to achieve and maintain a core ratio of 10% by the end of next year but have been set a

numerical target for capital. These countercyclical measures were taken to avoid rapid deleveraging and support lending to households and businesses.

Country/

EMIR /

MIFID II

Europe Requirement for most derivatives trading to be centrally cleared

through an approved clearing house and for all swaps subject to

this requirement to be executed on a regulated exchange or

through a "swap execution facility"

Reduced profitability of derivatives; lower

volumes foreseen

20132015 for MIFID?

Tobin Tax Europe Proposal by the European Commission to introduce a financialtransaction tax (FTT) by 2014. The tax would impact transactions

between financial institutions charging 0.1% for shares and bonds

trading and 0.01% for derivative contracts

Lower transactionvolumes foreseeable /

shift of business out of

continental Europe

11 member states haveagreed to pursue the proposal;

timing TBA; France has

already introduced its own and

Italy is planning to do same

Vickers

Report

U.K. Mandatory ring-fencing of U.K. banks’ retail banking operations

coupled with higher capital requirements. Banks will be requiredto establish a separate legal entity to provide retail and

commercial banking services and to have more capital than what

is mandated by Basel III.

Expected reduction in

ROE given greater

amount of equity

requested

Complete necessary

legislation by May 2015

Implementation by 2019

All U.K. headquartered banks will be required to operate with a

minimum leverage ratio of 3%.

Liikanen

Report

Europe Proprietary trading and other significant trading activities shouldbe assigned to a separate legal entity if these activities amount to

a signicant share of a bank’s business.


trading revenues

Still to be determined whether

these suggestions will beendorsed by the Barnier’s

commission and turned into

legislation

Banks should build up a sufficiently large layer of potentially bail – able – in debt. Bail-in instruments should also be used in

remuneration schemes for top management so as to better align

decision-making with longer-term performance of their banks.

Increased funding costsforeseen given investors

will likely price in bail-in

risk

Apply more robust risk weights in the determination of minimum

capital standards and more consistent treatment of risk in internal

models.


ROE given potential

increase of RWA

Adoption of the so called "Volcker Rule" to prevent or limitproprietary trading and direct investments in hedge and private

equity funds by banksRequirement for most derivatives trading to be centrally cleared

through a regulated approved clearing house and for all swapssubject to this requirement to be executed on a regulated

exchange or through a "swap execution facility"

Requirement for banks to retain a minimum tranche of each

securitization executed


trading revenues

Reduced profitability of

derivatives; lower

volumes foreseen

Potentially positive as it

could re-open thesecuritization market

July 2014

2013?

Substantial increase of amount and quality of regulatory capital as% of RWA

Introduction of a leverage ration based on total assets to control

balance sheet growth that may not capture in RWA

Introuction of a liquidity ratio to ensure banks can withstand a30-day period of market illiquidity

Introduction of a net stable funding ratio aimed at ensuring that

most assets are supported by stable funds

Key aspects for GIBs

NIM compression given

lower expected return

from liquid assets

Increased funding costs

given banks will have to

term out funding


ROE given greater amount of equity

requested and lower leverage allowed

Potential impact

January 2015

January 2018

Gradual phase-in to

January 2019 but

markets/regulators have

"forced" an earlyadoption and local ones

are pushing “higher”

finishes

January 2018

Expected timeline

TABLE 2: RED TAPE AND REGULATIONS TO COME (AND INCREASING BY THE HOUR)





9

Bank

VOLCKER RULE VICKERS REPORT LIIKANEN REPORT

Prop

Trading

BankRetail &

Commercial

Banking

Trading

Entity

> Derivatives trading to be operated from

a separate entity

> Substantial limits on proprietary trading

and investment in hedge funds and

private equity funds by banks> Some exemptions however apply

• Investments in govies, agencies or

muni bonds are allowed

• Hedging activities are allowed

> The distinction between proprietary

trading and hedging is not entirely clear

and could potentially allow GIBs to

maintain significant market risk (and

losses) as in recent “hedging” cases

> Primary focus is on retail and

commercial banking activities, not on

Investment Banking and trading

> Retail and commercial banks should

be ring-fenced via a separate legalentity within the Group

> Such an entity would:

• Have to adhere to higher capital

levels than what is mandated by

Basel III

• Not be allowed to carry out prop

trading and market making

activities, or engage in derivatives

transactions

• Have to limit its exposure to other

parts of the Group

Swap

push

out

> Mandatory separation of trading

activities only if they amount to a

signicant share of a bank’s business 1

> Trading activities include market

making, investment in private equityfunds and exposures to hedge funds

and Special Investment Vehicles

> Deposit-taking and the offer of

payment services are activities

reserved to Deposit Banks

> Deposit banks can also undertake

limited trading activities:

• Client-driven transactions with

narrow risks

• Securities underwriting

Deposit Bank

1 Over €100 bn or 15-25% of total assets

TABLE 2 (CONTINUED)





10

The Object O Game: A Focus on Fundamentals

Advisors, practitioners, and

commentators o all sorts have

oered easy explanations or

GIBs’ declining perormance

along with quick ixes or getting

the banks back on track. Even

“restructuring” is becominga buzzword – just another

euphemism or cost-cutting.

But the real question acing GIBs

now isn’t why aren’t they making

as much money as they once

did, but rather why were they sosuccessul in the irst place?

Let’s take a step back. Global

inancial systems, as is generally

agreed at the academic level,

are supposed to perorm six

undamental unctions or thebeneit o the wider economic

system:

• Helping to provide certainty

and speed in clearing and

settling payments related to

the global commerce andcapital trading that rest at the

core o modern capitalism;

• Helping to pool funds for

large, indivisible projects

and subdividing into shares

o ownership and equity at

risk o enterprises to acilitate

diversiication

• Helping to transfer excess

inancial resources across time

and space via market-tradable

instruments, as opposed to

the traditional lending o

commercial banks;

• Helping to manage risks –

through a variety o ways,

including hedging and

diversiication – to ultimately

transer them to their best

available holder;

• Helping to source, develop

and provide inormation

to markets that help in

perorming valuations and in

decentralising decision-making

at the irm level;

• Finally, helping to address

incentive problems – when





11

one party to a transaction has

exclusive valuable inormation,

or when one acts as “agent”or another “principal.”

These six unctions, in turn, drive

the strategic and operational

behavior o the main inancial

market participants, down to

the level o their oerings andservice/product innovation.

GIBs have traditionally played

a signiicant role in almost all o

them. Starting usually with the

provision o just one or two o

these undamental unctions,

global investment banks havetended to get involved in

as many areas as possible –

pursuing “strategic visions”

that highlighted the beneit o

“one-stop shopping,” “selective

conglomerate diversiication,”

“multi-business,” “multi-synergies,” and many other such

buzzwords.

In act, as highlighted in table 3,

most o the inancial players are

now doing (or trying to do) a bit

o everything, with questionableresults. In our view, the case or

clear-cut synergies derived rom

bringing everything under the

same umbrella is ar rom clear,

while the inancial risks and thereputational issues are diicult to

ignore.

The undamental goal

underpinning the six

undamental unctions – the

optimal allocation o scarceresources to maximize the

sustainable growth rate o

the world economy and the

prosperity o its population – has

gotten lost in the development

processes o the last ew

decades, because so manyplayers wanted to contribute to

so many unctions, with all the

conlicts o interest and lack o

transparency such an ambition

entails.





12

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Commercial

Banks

Clearing,Settlement &

Payments

Investment

Banks

Asset

Managers

General

Insurance

Shadow

Banking

Players

PoolingResources /

Indivisible Projects

WealthReallocation

in Time / Space

RiskManagement /

Diversification

Best MarketInformation /

Price Discovery

Incentive Issues /Asymmetric

Information

Level of presence in any given function Synergies between functions

Life

Insurance

Clearing,Settlement &

Payments

PoolingResources /

Indivisible Projects

Wealth

Reallocation

in Time / Space

Risk

Management /

Diversification

Best Market

Information /

Price Discovery

Incentive Issues /

Asymmetric

Information

PLAYERS

FUNCTIONS

NoneLow MediumHighVery High High Low Medium

N/M

N/M

N/M

N/M

N/M

N/M

Focus of

selective

Business Models

TABLE 3: FUNCTIONS AND PLAYERS AT THE CORE OF THE GLOBAL FINANCIAL SYSTEM





13

Financial “Steroids”: The Long-Term Cost o

Short-Term Returns

Investment banking, as we

have come to know it, was

based on an unsustainable

model. High leverage, risky

bets, and a period o poor

oversight boosted the short-

term returns o GIBs, much as

steroids enhance the short-

term perormance o athletes.

In particular, investment banks

relied on:

• Leverage. GIBs proited, as

did many others, rom the

cheap unding enabled by

the “easy” monetary policies

set by the world’s major

central banks (primarily the

U.S. Federal Reserve). Butmuch more than anyone

else, they pushed leverage

to its limits5: not just in terms

o quantity (measured by

ratios such as “total assets/

shareholders equity”), but

also o quality (measured by

such numbers such as the

“duration gap,” building highly

mismatched asset/ liabilities

term structures, such as the

kind that recently took down

MF Global). The strategy was

simple enough: until you make

a basic, positive ROI on any

business, you can multiply

its related ROE, adding as

much debt as you can, thus

“shiting” the same equity

risk to debtholders. And you

can urther “carry trade” that

debt, i you borrow in the least

yielding currency (e.g., thedollar or the yen) and invest in

others that oer more priced

reerence interest rates (e.g.,

emerging markets). I you do

5 The explosion o inancial assets and their growing proportion as a percentage o

world’s GDP implied a quasi-automatic “natural” increase in revenues or GIB.Taking derivatives as an example, a very proitable area or investment banks; thei r totalnotional amount grew rom $111 trillion in 2001 to $596 tril lion in 2007 (source: Bank o International Settlements).





14

it on the short term, you can

invest in longer maturities,

given the typical upwardsloping nature o the yields-to-

maturities curve.

• Principal investing. GIBs

proited, as did many other

investors (most o them in the

so-called “shadow banking”system o private investment

unds), by directly putting

their money at risk in any

kind o asset, rom inancial

instruments, to real estate,

to commodities and so on,

given the long expansioncycle that lasted until the

early days o the crisis. This

worked…until it didn’t. The

enabling circumstance was

the vast quantity o money

being pumped into the

economy by central banksand its “multiplication” by the

banking system through cheap

and easily available credit. But

even more than the “shadow”

players, the global investment

banks were able to proit rom

these emergent asset bubblesby structuring, slicing, and

selling them beore it was

too late – in a sort o asset-

management version o musical

chairs. They also proited byexploiting leverage and, more

importantly, the very same

conlicts o interest they were

supposed to address or the

beneit o the economy (i.e. the

sixth o the global undamental

unctions ocused on “incentiveproblems”).

• Conflicts of interest. GIBs, it

has been argued, proited rom

knowing more than they should

and ailing to be transparent

about their market knowledge.Oten, by stretching the notion

o “Chinese walls” beyond

any deinition oered by

compliance proessionals,

it has been said they used

this knowledge to outsmart

their counterparts in anysingle trade. It has even

been said that investment

banking is a business built

on conlicts o interest, and

cases o “moral hazard” and

“adverse selection” were

thus discussed or years inacademia and played out on

the Street or even longer.





15

And, it has been argued that

GIBs were more embedded

in the gambling culture o “winner takes all” than any

organizational arrangements,

compliance procedures, or

risk management systems

could detect and prevent. This

was the inal touch that many

say made the GIBs’ house o cards all – as leverage and

principal investing were built

on reputation.

This is why GIB players wanted

to put their ingers in so many

pies: to get into the “unction”o transerring resources across

time and space (through, or

example, the issuing o debt,

its securitization and sale, or

through an outright commercial

banking aggregation), thereby

urther acilitating their ownhyper-leverage. Providing

market inormation (through,

or example, their equity/ debt

research and sales) also actored

into this, enabling them to guide

(or at times misguide) markets.

And, inal ly, their investmentbanking and capital markets

businesses (the so-called

“private” and “public” sides)

were in a position to arbitrage

away easy opportunities builton asymmetric inormation.

Sensitive employees could in

act have been “beyond the

wall,” but their bosses – at some

level – were o course on the top

o it, and with a clear incentive

to look through it.

O course, these were the worst

excesses and hubris o just a ew

(now mostly deunct) players.

But that was enough to burst

many o the asset bubbles and

to initiate a chain reaction o systemic ailures that threatened

to destroy the global inancial

system.

Ater the political interventions

to save the “too big to ail”

players and the reams o newregulations, the GIB industry is

now on its knees – because o

its high costs, the low-growth

macroeconomic environment,

the dislocation o capital

markets, the European debt

crisis, the American iscalcli, and many, many other

much-discussed actors. But





16

undamentally, GIB is on i ts

knees because it inally had to

stop—and stop or good—usinginancial “steroids” and reverse its

prioritization o short-term proit

making over long-term viability

and sustainability.





17

Five years ater the onset o

the global inancial crisis, the

hangover appears to continue,

compounded by a host o new

regulations being written and

rewritten almost daily. Revenues

have decreased and continue

to all. At the same time, cost

incomes have continued to

rise, reducing net income and

payable dividends.

Market Capitalization (1)

(2007 – 2011, %, € billion)

Source: AlixPartners analysis of Capital IQ data for market capitalization, financial statements, press releases, Credit Suisse for capital raised.

(1) Of AlixPartners Global Investment Banking Universe

1,042

593

327776

2007 Capital Raised Market Loss 2011

- 57%

Asset-Driven

Universal 102 56

549 355

167 58

224 124

Liability-Driven

Universal

Pure Players

Regional Players

TABLE 4: THE BUSINESS AND THE VALUE CREATION IN GIB, PRE AND POST CRISIS

Based on these crude numbers,

market capitalizations have

decreased signiicantly – rom

over €1 trillion to ~€600 billion(a 57% value destruction i we

also take into account the

capital raised in the period) in

the time horizon considered

(table 4). Such loss o value

is also the result o otherdetrimental actors, such as:

Running The Same Plays: The Persistence o GIB

Business Models





18

• The lower expected

sustainable growth rate o the

global economy and o themature home markets that host

many GIBs, and o the GIB

industry itsel;

• The increased cost of risk

(and o equity premiums) now

considered or the global stock market and or this sector in

particular – compounded by

higher capital requirements;

• Finally, the impaired intangible

“goodwill” associated with the

GIB industry, in the wake o thecontinuous stream o scandals

that keep popping up by the

week (table 5).

Still, as they say, there’s nothing

new under the sun, and the

major banks are still ighting orthe ew deals and businesses

that are let in the market. In act,

it seems the current taxonomy

Player Date Issue Economic ImpactUBS September 2011 Unauthorized trading incident in the ETF Equity desk $ 2.3 billion

MF Global November 2011 $6.3 billion proprietary investment in Peripheral Europeanbonds via REPO agreements contributed to a massiveliquidity crisis and mark-to-market losses

Company Bankruptcyand $1.6 billion of customers’ money

BofA, Wells Fargo, JPMorgan, Citi

February 2012 Banks apparently robo-signed thousands of foreclosuredocuments without properly reviewing paperwork

$25 billion

JP Morgan May 2012 Inappropriate hedging activities of the CIO Office $5.8 billion(*)

Barclays June 2012 Manipulation of LIBOR reference rates $452 million

ING June 2012 Accused of covering up billions of dollars in fund transfersthat violated U.S. sanctions against Cuba and Iran

$619 million

HSBC July 2012 Investigated by U.S. regulators for laundering funds of sanctioned nations including Iran and Sudan

$1.9 billion

HSBC, RBS, Citi, DB,

JPMorgan, UBS

August 2012 Under investigation for suspected LIBOR-rigging TBD

Standard Chartered August 2012 Allegations that the bank schemed to hide transactionsthat breached sanctions with Iran, Sudan, Libya and Burma

$667 million

BofA September 2012 Some investors had argued that Bank of America madefalse or misleading statements about the f inancial healthof the two banks at the time of the Merrill Lynch acquisition

$2.4 billion

JPM October 2012 Civil lawsuit charges against Bear Stearns, a bank boughtby JPMorgan in 2008, arguing deception over mortgage-backed securities.

$297 million

Source: companies’ public announcements, press releases/articles (*) Potential additional $1.7billion in losses over the rest of the year as reported by the Company

on July 2012

TABLE 5: RECENT MEDIA EVENTS THAT HAVE IMPACTED GIB BRAND EQUITY





19

o business models could have

been written in 2007, with just a

ew amendments. We groupedthe top 15 GIBs6 according to

three key dimensions, namely

business model, geographical

scope, and scale (table 6).

Logically, the greater the scale

achieved and the greater the

weight in emerging markets,the better o a bank’s position

should be. However, neither is

having an appreciable impact

on productivity or proitability,

as many GIBs have recently

experienced irst-hand in Asiaand in the Middle East.

6 Representing over 80% o the global Capital Markets & Investment banking market.

Asset-Driven

Universal

Main

Features

• Global presence and

complete/wide offering of

services

• High Private Banking

relevance

Liability-Driven

Universal

PurePlayers

Regional

Players

Analyzed

Players

Revenue Mix

CM&IB

%

CM&IB 1

• Global presence and

complete/wide offering of

services

• Lending & Transaction

Services presence

• Global players purely

focused on CM&IBactivities

• Players focused and

relevant just on a specific

geographical region

(macro-area)

The Others

• Players focused just on few

CM&IB activities (e.g.

advisory) and/or on a

specific country

~100%

75%

25%

FICC & S&T

Equities & S&T

Advisory & Underwriting

Pure CM&IB Revenues

Rest of Business Units Revenues

Primary Research Focus

64%

16%

20%

44%

36%

21%

52%27%

21%

60%

24%

15%

~100%

85%

15%

• UBS

• CREDIT SUISSE

• JP MORGAN

• BANK OF AMERICA MERRILL LYNCH

• HSBC • CITIGROUP

• BARCLAYS • DEUTSCHE BANK

• GOLDMAN SACHS

• MORGAN STANLEY

• BNP PARIBUS

• STANDARD CHARTERED

• RBS • NOMURA

• SOCIETE GENERALE

• EVERCORE • BTG PACTUAL

• CHINA CITIC BANK

• BANCA IMI • JEFFERIES

• MACQUARIE

TABLE 6: INVESTMENT BANKING BUSINESS MODELS: NOTHING NEW UNDER THE SUN





20

Our analysis, then, is ocused on

the main business models taken

into consideration:

• Liability-driven global

universal/investment

banking groups. This cluster,

which includes JP Morgan-

Chase, Bank o America-Merrill

Lynch, HSBC, Citigroup,Deutsche Bank, and Barclays,

is characterised by global

reach, product breadth, and

scale. In addition, the existence

o commercial banking and

investment banking under

the same roo should allow“synergies,” driven by the

exploitation o the lending

power o the commercial

parent and o the global

connectivity o its transaction

services business, to enable

cross- and up-selling o investment banking products

and services.

• Asset-driven global

universal/investment

banking groups. This cluster,

made up by the two bigSwiss banks, UBS and Credit

Suisse, is characterized by

synergies that are sought at

the intersections o investment

banking and private bankingand, potentially, asset

management, with a much

lighter recourse to the lever

o balance-sheet lending to

try to originate (and usually

subsidize) GIB mandates. O

course, while multiple businessand organizational solutions

have – at least on paper –

been tried by these and other

players, a ull-blown execution

o this idea appears uninished.

• Pure investment bankingplayers – or whatever is

left of them. This cluster

is the one that suered the

most rom the crisis. Apart

rom Goldman Sachs and

Morgan Stanley in the United

States, it appears that thereare no other global players

o scale le (given Nomura’s

retreat to Japan). A number

o minor players, specializing

in the pure “broker-dealer”

business model (comprising

capital markets and investmentbanking, e.g. Jeeries (table 7)

in the United States ) are rapidly





21

• Jefferies is a global investment bank founded over 50years ago as an equity trading company focused onserving large institutions that wanted to trade withoutimpacting the public market. Later Jefferies specialized inhelping to grow mid-sized corporates

• In its history Jefferies has progressively diversified itsportfolio of activities in terms of geographies andbusinesses, including:

− Buying a global commodities and financial derivativesbrokerage in 2011 (Bache Global Commodities) fromPrudential Financial

− Investing together with the government of Singaporein a commercial real estate initiative

• Jeeries’ goal is to become one of the top 10 U.S.

investment banks, taking advantage of the issues facedby many leading players

• Today Jefferies has 30 offices globally, ~3,900employees and a market cap of ~$3 billion

• It has substantially improved its league table position inthe recent past, moving from 32nd for global IB fees in2009 to 17th in 2011, with best rankings in M&A and American Investment Banking (12th in both) 1,

Key Information

1Source: Thomson Reuters’ Global Investment Banking Review

Revenues ($ million)

Net Profit ($ million)

2011 2010 2009

2.100

H1 2012

2.200

2.500

1.500

H1 2012 2011 2010 2009

310

240

290

170

TABLE 7: SUCCESS STORY: JEFFERIES

rising through the ranks, and with

some success in proftability and

market value, oen specializingin their “home” domestic markets

(either mature or emerging)

or in mid-market clients, or

both. They are thereore trying

to intermediate the ongoing

reallocation between the “old”

stocks o wealth accumulatedin the developed countries

(in need o redeployment at

interesting expected yields)

and the “new” lows o wealth

being created in developing

countries (in need o the

debt inancing and equitycapital required or sustaining

growth).





22

7 Generally relected in a “Top 10” position in the so-called “league tables”.

• Standard Chartered is a global retail and commercialbank with a strong wholesale division. Founded over 150years ago, it rapidly expanded in emerging markets andtoday is one of the top banks in Asia, Middle East, and Africa. Its geographical footprint is a clear differentiator of its offering

• Its strategy is to focus on these fast growinggeographies, offering a complete range of services. Over time, it has developed businesses such as capitalmarkets, corporate finance, and transaction serviceshosted within its Wholesale Banking Division

• In 2011 this division contributed to over 75% of the totalprofit before tax

• Standard Chartered leverages its global clientrelationships to supply a comprehensive set of productsand services, among which a significant role is played bytransaction services ($3.2 billion) and sales and tradingof FX/rates (which represent a substantial portion of the$3.7 billion generated by the FM division)

• Lower contribution and rankings (generally below Top 10)in advisory and underwriting, except for Asian Debt andIslamic Banking1

Key Information Wholesale Division Revenues ($ billion)

Wholesale Division PBT ($ billion)

H1 2012 2011 2010 2009

9,3 9,9

10,8

5,9

H1 2012 2011 2010 2009

4,0

4,7 5,2

2,9

1Source: Thomson Reuters’

TABLE 8 : SUCCESS STORY: STANDARD CHARTERED

• Regional players. This cluster

is made up o players with

a main ocus and particularrelevance7 in a certain

geographical area – whether

EMEA (e.g. Société Générale

and BNPP or Unicredit and

Santander), North America

(Royal Bank o Canada, Wells

Fargo), Japan (Nomura), or theemerging markets (Standard

Chartered). Also, players in

this cluster have total revenues

o $3 - 10 billion and are

generally ranked 11th or lower

in the global league tables, in

contrast with the $10 billion-plus turnover (and consistent

Top 10 ranking) o global

universals and pure players.

As mentioned above, and as

illustrated by the success o

Standard Chartered (table 8),

a leading position in emergingmarkets is a key ingredient or

revenue growth and proits.





23

• The “others.” This remaining

cluster is much lighter in

weight – i measured bytotal revenues generated. It

comprises players that ocus

on selected activities/products

(e.g. inancial advisory) and/

or one or only a ew countries.

Among them, the pure

advisory boutiques can bevery light in capital, ocusing

mostly on M&A and, with

marginal variances, on debt

restructuring and eventually

on private banking and asset

management. In addition to

legacy brand names such asRothschild and Lazard, the

number o specialty boutiques

(rom Greenhill to Evercore

(table 9), rom Moelis to Perella

Weinberg) has skyrocketed,

luring a number o top

investment bankers awayrom their previous positions

at global bulge bracket

banks. In general, while their

proitability has been highly

skewed (measured in terms

o revenues per partner, and

not as ROE), their oeringshave been pretty traditional,

with competitive strategies

just ocused on outsmarting

the global behemoths

that are distracted by theiright or survival and talent

retention in the new regulatory

environment. These specialty

boutiques have also marketed

their transparency and lack

o conlicts o interest quite

well as value propositions. Inother cases, some players have

ocused their strategies on

exploiting a leading position in

one or ew countries – whether

mature or emerging – where

they enjoy some competitive

advantage. And there havebeen a number o success

stories, rom Banca IMI (table

10) to BTG Pactual (table 11).





24

• Founded in 1996, Evercore is an investment banking boutiquewhich has grown substantially since the beginning of theglobal nancial crisis, leveraging its independent advice “value

proposition”

• While financial advisory is its core activity (~80% of totalrevenues) it is also active in institutional equities, wealth andinvestment management ($13 billion in assets under management)

• Since its opening, Evercore has attracted senior financeprofessionals with distinguished reputations on the market andhas hired 5-7 MDs per year in the recent past

• Today Evercore is pursuing a global markets expansionstrategy via a combination of:

− Direct presence (U.S., U.K., Mexico, Hong Kong, andBrazil) and

− Strategic alliances (China, Japan, Korea, and Argentina)always leveraging on its independent advisory key asset

• The Company was ranked 14th globally1 in ThompsonReuters’ 2011 M&A review, behind Lazard and Rothschild but

well ahead of all other advisory boutiques

• It has achieved the highest fee growth for the period 2008-2011

Key Information

1 Worldwide completed transactions ranking

Revenues ($ million)

Net Profit ($ million)

H1 2012 2011 2010 2009

520

373

313 278

H1 2012 2011 2010 2009

38 33

63

26

TABLE 9: SUCCESS STORY: EVERCORE

TABLE 10 : SUCCESS STORY: BANCA IMI

• Banca IMI is part of Intesa Sanpaolo Corporate and

Investment Banking (“CIB”) Division

• Intesa Sanpaolo (“ISP”) is a leading banking group in

Italy with a widespread distribution capacity (5,600

branches) and a high market share (15%+ in customer

loans/deposits)

• Banca IMI was established in 2007 from the merger between two leading Italian players (Banca Caboto and

Banca IMI). It operates in three main business areas:

Investment Banking, Capital Markets, and Structured

Finance

• Leading position in Italy1 in DCM (#1 bookrunnner for

each of the past five years) and Structured Finance (over

€27 billion of structured and arranged transactions from

2007 to 2011

• Capital Markets:

− Market Making on ~6,500 securities

− 1 for cash instruments transactions volumes on

domestic market (MOT)

− 2 Italian govies specialist

• A market leader for M&A transactions in Italy (>100

transactions in the last three years)

Key Information Revenues (€ million)

Net Profit (€ million)

1.059 1.1031.171

860

2009 2010 2011 H1 2012

517547

512

401

2009 2010 2011 H1 20121Source: Banca IMI’s Corporate Presentation





25

• Shadow banking players.

This inal cluster is not

addressed in our analysis and

covers a signiicant number

o very diverse players – rom

hedge unds to structured

investment vehicles, rom non-bank money lenders (including

supermarket chains and P2P

websites) to specialized

lending houses (including

manuacturers’ inancing

arms), rom money market

unds to securities lenders.This cluster has enjoyed mixed

results, with wide variations

across sub-taxonomies and

players. Still, with all the

worry about the systemic

risks that could originate

rom this opaque and usually

highly leveraged segment

o inance, it is experiencingcontinuous growth as a

consequence o the looming

GIB regulations, starting with

the proposed Volcker rule. For

the purposes o this discussion,

we provocatively propose

including in this alreadyextended universe o players

Chinese banks and others

TABLE 11: SUCCESS STORY: BTG PACTUAL

• BTG Pactual, dominant franchise in Brazil, is aninvestment bank, asset and wealth manager

− Its business units include: Sales and Trading (32% of revenues), Investment Banking (12%), AssetManagement (16%), Corporate Lending (11%), andWealth Management (5%).

• Pactual, established in 1983, was sold to UBS in 2006 for $3.1 billion and then bought back by BTG (a Brazilianinvestment bank founded by Pactual’s former CEO) in2009, creating BTG Pactual

• Since then BTG Pactual pursued significant growth both indomestic and other South American markets, with offices

in four continents: South America (São Paulo, Rio deJaneiro, Brasília, Recife, Porto Alegre, and BeloHorizonte), North America (New York), Europe (London),and Asia (Hong Kong)

• In 2012 the company listed in Brazil raising $1.96 billon,for a market cap of ~ $14 billion - the largest IPO in Brazilsince 2009

• Since 2006, BTG Pactual helped advise on seven of every10 stock sales in Brazil and on one in every four merger deals1. In 2011, it led Thomson Reuters' M&A advisoryrankings in Brazil and ranked #9 in Brazilian debt2.

Key Information Revenues (R$ billion)

Net Profit (R$ billion)

2009 2010 2011 H1 2012

2.3 2.4

3.2 3.2

H1 20122011

1.9

2010

1.1

2009

1.41.6

1Source: Reuters. 2 Thomson Reuters.





26

TABLE 12: FORGOTTEN SHADOW PLAYERS: THE CHINESE BULGE BRACKETS ARISING

• None of the Chinese investment banks has made it (yet)into the Top 25 list of global investment banks

• Many of them have, however, established leadingpositions in:

− Products (equities)

− Geographical areas (Asia, on the back of their dominance in China)

• Some of these players have JVs/strategic relationshipswith western names, such as

− China International Capital (co-founded in 1995 byMorgan Stanley), the first domestic investment bank

− Citic, that counts BBVA as a significant shareholder and partner

• Given Asia’s growing share of GIB business (from 5% in

2005 to 10% in 20111), it may seem just a matter of timebefore they make it into the Top 25

• The recent announcement by China Construction Bank of $15 billion available for investing in a European bank

may also herald the beginning of an era of geographicexpansion for Chinese banks (both commercial andinvestment), further enhancing their growing role

Key Facts Ranking of Chinese Players

GlobalEquity

Asia-PacificInvestment

Banking

AsiaEquity &

Equity-Related

# 13 # 10 # 11

# 14 # 12 # 5

- # 14 # 9

- # 17 # 13

- # 19 # 18

- # 20 # 7

1Source: Dealogic

PING AN

OF CHINA

GUOSEN

CHINA CITIC

BANK

CHINA

MERCHANTS

SECURITIES

BANK OF

CHINA

CICC

that are signiicantly inluenced

by a national government

(table 12). Such players act asnational champions pursuing

not only economic but also

political objectives (such as

targeted economic growth,

ull employment, or social

stability). These players tend to

be airly opaque in their actions,reporting, and compliance with

(or, possibly circumvention o)

global regulations. Shadow

players could thereore become

more and more interesting

counterparts (as clients,

partners, and allies) o GIBs or

(in our extended deinition) even

become their major competitivethreat.





27

The Numbers Game: Trends In Perormance

Our analysis o the top 15 GIB

players shows how little has

been done that is really new

until very recently (and still, not

suiciently) to cope with the new

market conditions. Instead, the

2009 market rebound promptedmost o the players to revert to

“business as usual,” rebuilding

their headcounts and cost bases

as switly as they downsized

them ater the all o Lehman

Brothers. We eel that the recent

rebound in the real estate sectorin the United States could

provide some with another

excuse to postpone what needs

to be done.

Indeed, only ater the

emergence o the Eurozonedebt crisis (starting in August

2011 with the widening o the

BTP and Bonos spreads over the

Bund) have major GIB players

slowly started to realize that

the pre-crisis salad days might,

alas, be over. Still, the actionstaken so ar appear o track and

insuicient.

According to our analysis,

capital markets and investment

banking revenues have steadily

declined rom about $360

billion in 2009 to about $250

billion in 2011 (although with

dierent trends in its main threebusinesses—revenues slightly up

or advisory and underwriting,

down marginally in equities,

and decreasing substantially in

FICC).

At the same time, marketconcentration (table 13) has

grown substantially in FICC to

the beneit o global universal

players (which have integrated

along the way most o the ailed

or crippled institutions including

Bear Stearns, Lehman, andMerrill Lynch), while decreasing

in other businesses, rom

advisory to equities, to the

advantage o boutiques and

smaller, dedicated operators).

This latter phenomenon is

particularly interesting given thatthe scarcity o lending, placing

power, and good credit ratings





28

would in theory suggest that

the leading global universal

players should have been ableto lever these advantages to

get a growing share o these

businesses.

31.8%

Market Share – Advisory & Underwriting

(2009 – 1H 2012, %)

Market Share – Equities

(2009 – 1H 2012, %)

Market Share – FICC & S&T

(2009 – 1H 2012, %)

Market Share–

Total(2009 – 1H 2012, %)

9.0% 8.7%7.6%6.1%

53.4%52.8%49.0%46.0%

12.2% 14.6%

16.1%17.5%15.4%8.8%13.4%

18.0%

2012201120102009

14.6%

14.2%

16.6%17.2%

33.1%30.2%

33.6%35.9%

18.0%20.0%

13.6%

16.0%

17.5%

21.3%21.6%

15.0%7.9%

2012201120102009

Source: AlixPartners’ analysis based on Deutsche Bank data and Annual Reports

7.6%8.4%8.4%7.4%

34.4%

33.3%

33.0%

38.6%

12.0%

11.9%

12.1% 13.3%

8.3%9.3%10.0%

8.9%

37.7%37.1%36.5%

2012201120102009

9.9%10.4%9.6%8.3%

44.9%43.4%

41.7%41.7%

13.1%14.6% 14.8%14.8%

13.8%15.4%14.4%14.9%

18.3%16.2%

19.5%20.3%

2012201120102009

Asset-Driven Universal Liability-Driven Universal

Pure Player Regional Player

Others

19.0% 17.4%

17.3%

15.5%

14.4% 11.8%

9.7%

TABLE 13: MARKET SHARE BY CLUSTER AND BUSINESS

In terms o proitability (table 14),

the industry has experienced

a signiicant contraction (-23%

p.a. or our universe) due to both

lower revenues and – until the

irst hal o 2012 – higher costs

and headcounts (as measured by

“cost to income”).





29

TABLE 14: P&L OF GIB UNIVERSE CONSIDERED

Economics Evolution

(2009–

2011, Index, 100 = Revenues 2009)

Economics Evolution(1)

(1H- 2011–

1H-2012, Index, 100 = Revenues 1H 2011)

(1) Nomura not considered in this players’ analysis

Cost/Income Evolution

(2009–

2011, %, Index, 100 = Operating Expenses 2009)

Cost/Income Evolution(1)

(1H-2009–

1H-2012, %, Index, 100 = Operating Expenses 2009)

72.7%64.8%

54.7%

201120102009

66.5%63,9%

1H - 20121H - 2011

Operating

Expenses 100 108 108

Operating

Expenses 100 91

Source: AlixPartners’ analysis based on Annual Reports

8191

100

595955

233135

201120102009

Revenues OPEX Pre-Tax Earnings

88100

5864

2537

1H - 20121H - 2011

Revenues OPEX Pre-Tax Earnings

Given that overall assets have

also risen (counter-intuitively,

given the greater costs and

constraints introduced by the

new proposed regulations,

but understandably, given

the continuous temptation o

GIB to go back to the dope o

leverage), the ROA o GIB has

particularly suered, almost

halving its levels between 2009

and 2011 (table 15).





30

TABLE 15: ASSETS AND ROA EVOLUTION OF GIB UNIVERSE CONSIDERED

Assets and ROA Evolution(1)

(2009–

2011, %, Index, 100 = Assets 2009)

Assets and ROA Evolution(2)

(1H-2011–

1H-2012, %, Index, 100 = Assets 2009)

Total Assets 100 102 112

(2) ROA computed as PBT / IB Division Assets at the end of the year; Nomura,

RBS and BNP not considered in this players’ analysis

117 113Total Assets

(1) ROA computed as PBT / IB Division Assets at the end of the year; Nomura not

considered in this players’ analysis

Source: AlixPartners’ analysis based on Annual Reports

0.42%

0.62%

0.69%

201120102009

0.23%

0.36%

1H - 20121H - 2011

O course, as the various

“success stories” included in this

discussion show, opportunities

or growth and proitability are

nonetheless available or players

that lever and ocus on some

competitive advantage. Onaverage, however, the trends do

not avor the number crunchers

in any single taxonomy o

their main business models as

described above. Exploring the

Cartesian axis o “cost/income”

and ROA suggests, in act, that

the “crunch” is yet to come,

with the “asset-driven universal”

group leading the way, ollowed

by regionals and “liability-driven

universal” group (table 16).“Pure players” are apparently

better placed, but in any event,

the outlook across the GIB

sectors is worrisome.





31

TABLE 16: COST AND BALANCE SHEET PRODUCTIVITY: TRENDS BY CLUSTERS

0%

20%

40%

60%

80%

100%

0.00% 0.50% 1.00% 1.50%ROA (1)

Cost/Income

(1) ROA computed as PBT / IB Division Assets at the end of the year

(2) Nomura not considered in this analysis

Asset-Driven Universal Liability –Driven Universal Pure Player Regional Player (2) 2011 2009 Average Revenue

The consequences could be

quite stark. The targeted ROE

o GIB expected by market

practitioners may remain

well below its cost o capital

(heroically assumed to be in

the range o 10-12%). SuchROE projections should

thereore translate into a

modest recovery o the stock

market capitalization o the

GIB players, i we optimistically

assume the multipliers linking

proitability and market value –

notwithstanding the damage to

“brand equity” and “intangibles”

– will hold true (table 17).





32

TABLE 17 : ESTIMATED ROE AND MARKET CAPITALIZATION FOR GIB

ROE Evolution(2011 – 2015E, %)

6.16.8

7.98.4

2011 2012 2013 2014

Market Capitalization Evolution(2007 – 2014E, %, Bn €)

Estimated cost of equity: 10-12%

Source: AlixPartners analysis of Thomson One data

Source: AlixPartners analysis on Capital IQ data for market capitalization,

financial statements, press releases, Credit Suisse for capital raised.

1,042

593762

327

776

169

2007 Capital

Raised

Market

Loss

2011 Market

Gain

2014

- 44%

Asset-

DrivenUniversal

102 56

549 355

167 58

224 124

Liability-Driven

Universal

Pure

Players

RegionalPlayers

60

478

72

152





33

New Rules: Recommendations For GIBs

Is the current taxonomy o

business models suicient to

enable the GIB industry to

withstand the global crisis and

solve its structural proitability

and reputational issues? Are the

ew identiiable success storiesrobust and diverse enough to

allow or the proper unctioning

o the global inancial system?

Would marginal strategic

adjustments, incremental

operational improvements, and

some pre-crisis inancial “tricks”be enough or the overall GIB

industry to survive the upcoming

wave o (at least partially)

politically-driven regulations?

We believe not.

Instead, GIB players should

change proactively, beore any

Volcker-Vickers-Liikanen-Barnier

rule, report, or commission

orces change upon them. And

they should change quickly

and decisively. GIB players, wewould argue, need to solve, in

a business-minded way, their

own undamental “steroid”-

driven contradictions and design

new businesses and operating

models or the uture.

This is a signiicant and

potentially painul challenge, butthe beneits would be signiicant

and lasting. It could bring radical

improvements in the industry’s

productivity, a relatively quick

rebuilding o its reputation and

brand equity, and a higher, more

stable (and socially acceptable)proit sharing among its

stakeholders. It could even

become the biggest booster

or the recovery o the global

economy’s growth trajectory –

letting the inancial system work

its optimal allocation unction inthe best way.

Let’s consider some

examples driven by the three

“perormance-enhancing drugs”

previously described:

• Through excessive leverage,

GIB supported asset bubbles,





34

and multiplied systemic risk.

But the amount o leverage

was driven by lax monetarypolicies and a wrong

valuation and pricing o the

risks involved. Solutions o

the Glass–Steagall variety

may reduce this risk, but at

a huge “irst impact” cost to

the industry. More simply,universal banks could price

lending independently, taking

into consideration all the risks

involved and not allowing

the indirect subsidization o

investment banking’s (once)

hetier mandates. Universalbanks may continue to exist

i they create an internal,

competitive marketplace

where business units can trade

or approach the same client at

prevailing market conditions.

Rigid governance rules shouldthereore be coupled with

clean and direct incentive

systems, with single business

units acting like independent

entities. I this kind o abric

ails to produce the synergies

so oten touted in the past,independent business units

could be spun o, split out,

loated in the stock market,

or sold to private equity

investors – or pooled withsimilar competing operations

to become even more

productive, via greater scale,

specialization, and ocus on

core activities. In any case,

such a scheme would also help

GIB players address all kinds o conlicts o interest driven by

the challenge o asymmetric

inormation that naturally arises

when an investment bank is

an advisor in a deal where it

is also a directly or indirectly

interested counterparty, ora (supposedly) independent

inormation provider, or

whatever other role is being

played;

• Through excessive risk taking,

GIBs realized quite asymmetricpayos in the way their

shareholders, debt holders,

and key employees were

inancially rewarded. These,

in turn, drove moral hazard

throughout the industry.

The risk coming rom the“gambling business” was then

compounded by the mistaken





35

evaluation o where the

economy was going – hubris

and the paper gains associatedwith stock options uelled a

sense o inallibility among the

industry’s best and brightest.

Volcker’s or Liikanen’s kind

o solution can deine exactly

how much and what kind o

risk to undertake, but thatagain could be proactively

addressed i GIBs decided on

their own to segregate client

business rom other principal

businesses. Theoretically,

their shareholders’ capital

is better reinvested i givenback to investors who can

then choose to diversiy their

wealth by themselves, or

through the asset management

industry. The only equity

remaining in the GIB business

should thereore be usedas “operating capital” to

support lows and advisory

businesses. Principal inance

and proprietary trading units

could be spun o/split out to

become independent hedge

unds or asset managers, orconverted to client business

(advising clients on how to

actively manage their capital

and balance sheets);

• Through unresolved conflicts

o interest, GIBs drove a

number o scandals that were

at the heart o the beginning

o the crisis, compounding

its disastrous eects on the

overall economy. The globalcrisis was based on macro

undamentals, but, we may

argue, it exploded because

o micro investment bankers.

And this has not helped the

GIB industry in protecting

its reputation and intangiblevalue. The detailed regulations

being written on compensation

systems (with caps on annual

remuneration, rules on vesting

periods, and bonus-malus

systems) could be actually

anticipated by GIBs anddesigned and implemented

on principles that make much

more economic sense. GIB

players could, or example,

compensate their employees

or the value they truly bring,

calculated on the basis o strictproductivity benchmarks with

similar unctions operated





36

in other industries, rom

proessional services, to

retail, to manuacturing, tocivil service. For example, is

the M&A proessional more

comparable with a strategic

consultant or with a real estate

agent? Or is a GIB back-oice

employee more comparable

with the back-oice employeeat a car manuacturer or at the

Internal Revenue Service?

All these arguments bring us to

consider the ollowing strategic

orays:

• GIBs could consider “breaking

up” their business models

beore actually being

compelled to do so by the

orces o regulation. This

does not necessarily mean– at

least in the short term – anactual, ull-blown separation

o businesses and o their

shareholders (as in the Glass–

Steagall world). The creation

o an internal, competitive

marketplace, managing the

interplay o diverse businessunits and the optimal allocation

o scarce resources, could

create economic transparency

and avoid subsidization,

ostering more directaccountability at the single-unit

level;

• GIBs could therefore consider

unbundling their value

propositions and commercial

value chain, providing theirbest objective advice to clients

on the basis o an “open

platorm” approach. This

would allow them to play the

trusted and unbiased advocate

role or their core clients – i

they are then committed tosource in the market the best

and cheapest products that are

required to implement the best

solution recommended;

• GIBs could therefore refocus

their product/service platormson their relative comparative

advantages, allowing urther

consolidation in the industry at

the platorm level: swapping

operating assets, pooling

them together, or clubbing to

negotiate together, in the bestway o trade, their outsourcing

to a non-bank third party;





37

• GIB could be guided, in

this deeply transormative

process, by the pole star o productivity – learning how

to do more with less, in a

shorter timerame, and with

better results. Breaking up

their business model (at least,

virtually, through an internal

marketplace) and unbundlingtheir value proposition and

commercial value chain would

be instrumental, as this would

allow a more direct and

immediate benchmarking with

other non-banking sectors,

suggesting the route aheadtowards the “industrialization”

o the GIB industry.





38

In The Penalty Box: Growing with Scarce Resources

On the basis o our analysis o

the current business models,

we could have easily argued,

as many others have done time

and again, some minor tweaks

to business as usual. Such

proposals include:

•Liability-driven universal banks

could better exploit (with a

“carrot and stick” approach)

their lending capabilities and

“hyper bundle” the richer

GIB oering with the nowmuch-in-need inancing; i

they push global scale and

international scope to its

limits, consolidating weaker

players; or even gambling in

new ventures with “shadow”

partners – covered as they areby the “too big to ail” stop-loss

insurance.

• Asset-driven universal banks

could exploit even more o

their conlicts o interest and

“hyper bundle” the richerprivate banking oering with

more “interesting-to-know”

inormation coming rom the

investment banking or asset

management businesses and,

i they reach global coverage,

with a better ootprint in

emerging and growing

markets.

• Pure investment banks could

succeed i they dominate

the market, reducing the ew

remaining into a monopoly

or duopoly and arbitraging

among dierent jurisdictionsto basically do more o the

same through new loopholes.

They may also buy time

entering into new, less

sophisticated and protected

markets – intermediating the

still unsolved geopoliticalimbalances on the commercial,

inancial, and iscal sides.

But, we believe these kinds o

strategies would, at most, buy

time and enable only short-term

gains. They would not solve thestructural issues o overcapacity,

o shrinking revenue pools,





39

and o disgruntled customers;

they would recover neither

productivity nor proitability.Instead, banks much choose to

break up and unbundle business

models. This would allow:

• The reocusing o GIBs into

categories such as “designer,”

“assembler,” “specialized mono-liner,” and “mega actory.”

Some o the players (perhaps

the strategic boutiques) may

be better o just reocusing on

strategic advice – inding and

developing the right solution

to the inancial needs o thecustomers – or its “design.”

Others (perhaps the regional

commercial banks) may just

“assemble” the required

constituents, given the design,

leveraging their local presence

and relationships. Others mayocus on very speciic products

(say, commodity derivatives)

to reach barriers o know-how,

lows and scale-scope; still

others may just become even

bigger, dominating multiple low

businesses, where technologyand scale-scope are central.

Some, however, may be able to

compete in multiple roles, i they

pursue the internal market-based

break-up, creating independent“champion” units;

• The transformation of the

top-to- bottom proit and loss

statement:

1. Horizontal ly, GIBs couldleverage products and service

platorms across business

units (e.g. the derivatives desk

across investment banking

and private banking) or even

counterparts (e.g. the IT/

back-oice actory acrossall European GIB) to drive a

massive reconiguration o

cost structures. This could

lead to lower, more variable

costs driven by “pay per

use”– driving productivity

to levels achieved inmanuacturing. Unbundling

would, thereore, overcome

the limits o most o the

integrated business models

that had developed

through complicated cross-

subsidization to the point thatit was unclear who, i anyone,

was making money;





40

TABLE 18: SHARING AND POOLING OF OPERATING PLATFORMS IN OTHER INDUSTRIES:

SUCCESSFUL CASE STUDIES

• Scope of the initiative: Implement a Procurement Shared Services (PSS) platformfor the indirect spend of the two companies

• Targets/results: Reduce purchasing spending by 20-40% in the first three years

and keep a 3-5% continuous yearly cost reduction after the fourth

– Leverage pure efficiency increase, push towards standardization and industrialization and

permanent benchmarking

– Enhance quality through “professionalization” of services and bigger critical mass per function

– Generate tangible benefit to the organization through a full customer orientation approach

Aerospace and

defense players

• Scope of the initiative: Implement a shared purchasing platform to achieve

significant cost savings for the two players involved

– e.g. scaling up volumes and reduce unit component prices

• Targets/results: Implemented a Procurement Alliance (PA) that eventually led to a

10% saving of common spending – 1.5 years from design to the up-and-running

organization

– Global strategic sourcing entity with the target to negotiate large volume contracts

– Local procurement units in charge of purchasing activities leveraging larger scale supply agreements

Large global TMT

players

2. Vertically, GIBs could leverage

other distribution networks,such as the ones already

in place and run by local

commercial banks that could

sell more at their SME and

private clients through some

kind o “gray” or “white”

label alliance with a GIB.This approach to “smart”

investment banking – aimed

at middle-market clients –

could be successul only i

both GIBs and local banking

partners can deliver on a

very eicient “cost to serve”basis with a proposition

that is highly personalized

but still consistent with the

dierent (and much lower)target revenues attainable per

client. We may call this “mass

customization” o the GIB

market oerings – something

that has already been

successully achieved in most

manuacturing industries,rom apparel to technical

equipment to ood;





41

TABLE 19: THE LOGIC AND POTENTIAL BENEFITS OF “SMART” INVESTMENT BANKING

• Huge number of commercial banks with significant lending

activities to SME but lacking an investment bank “in house”

• Given limited (if any) value creation of these activities, such

intermediaries could cross-/up-sell investment banking

products and services to their clients

• The concept of “Smart” Investment Banking aims to provide

value to both the Investment (IB) and the Commercial Bank:

– The former gets access to a new distribution network for

its products/ services

– The latter realizes a new revenue stream via a

commission-sharing agreement with the former

• In order to be successfully executed, this strategy requires a

number of carefully planned steps, including the appropriate

identification and selection of:

– The sub-segment of corporate clients that may be

interested in this additional offering

– The products/ services that are more suitable to be

offered in a cost-effective way to such corporates

• Execution itself should take place in a cost-efficient way,

either by standardization/limited customization of the offer

and/or the maximum exploitation of digital channels

The Opportunity Set

1. Clients’ appetite

2. Ease of sale

3. Profitability

4. Reputational risks

5. Competitive edge

Checklist for Product Selection

Quantitative items, such as:

1. Turnover

2. Geographical scope

3. Number of employees

Qualitative items, such as:

1. Propensity to innovation/new investments

2. Industry attractiveness

3. Current stage in company’s life cycle

Checklist for Client Selection

3. Finally, rom a client-centric

point o view, GIBs could

augment brand equity and

the intangibles o their value

propositions, thus reinorcing

the bottom-line synergies

addressed “horizontally” andthe top-line ones targeted

“vertically.” They could do

this by delivering objective

advice ocused more broadly

than on just M&A. GIBs could

oer a broader strategic

agenda in the dialoguewith their clients, including

options or restructuring and

growth, globalization, and

digitalization o their business,

and any kind o opportunity

linked to active balance-sheet

management (with greater

ocus on real estate and on

other non-perorming assets).As explained, objective

strategic advice should inally

be able to deliver products

and other structured solutions

through an open platorm,

e.g., not necessarily with

captive products o the bank.





42

TABLE 20: A NEW APPROACH TO STRATEGIC – NOT INTERMEDIATION – ADVICE

38%42%50%

11%12%9%

201120092007

www.alixpartners.com 24

• Offering strategic advisory services could help GIB

rebuild customers’ trust and differentiate among

competitors

Strategic advice goes beyond traditional financial advisory

and incorporates two key features:

– Strategic advice, including all kinds of financial,

industrial, operational, and commercial aspects

– Risk/capital advice, including advanced services such

as active balance sheet management and regulatory

and compliance aspects (“virtual CFO”)

The strategic advice would focus on strategy and

restructuring, with greater relevance to industrial skills and

know how around financial engineering and M&A

Risk solution advisory and structuring should have a

greater focus on “advice” and a proposition of “open

market” to source the best financial products that are part

of the solution

Strategic advice units could generate revenues:

– Directly, thanks to fees from strategic advice and/or

risk management

– Indirectly, via better/ larger opportunities for traditionalproducts (M&A, ECM, etc.) derived from offering

innovation and becoming the customer’s trusted

adviser

The potential of strategic and truly independent advice is

already apparent in adjacent industries, such as Private

Banking, Asset Management/Gathering distribution, and

Management Consulting

•

•

•

•

•

The Opportunity SetThe Growing Importance of Advice: Market Share

of 401k Plans in the U.S.

Registered investment adviser (RIA): Anadvisor or firm engaged in the investment

advisory business and registered either with

SEC or state securities authorities, paid via an

advisory fee and not by product commissions

Dually Registered: Individual registered with

both a registered investment advisor and a

broker-dealer, paid in advisory fees and/or

product commissions

Wirehouse: A licensed, full-service securities

broker directly affiliated with a major, multi-

branch brokerage firm (e.g., Morgan Stanley,

BofA, Wells Fargo, …)

Others (Investment Banking Divisions,

Regional Players, Banks and Insurance)

Source: Cerulli Associates, 2011

The Growing Importance of Advice: Management

Consulting Revenues in Europe (€B)

42% 43% 50%

2008 2009 2010 2011E

86,7 83,7 86,2 89

Source: Survey of the European Management Consultancy 2011/2010, FEACO

Revenues %

of Business

Consulting

activities

Total MC Staff

(.000) 557 574 659 N/A

>

Revenues

of other MCactivities

(e.g. It

consulting)

16%22%

11%7%7%

These strategies will need to

be implemented on the basis o scarce resources and a number

o tight constraints – overcoming

traditional paradigms, such

as the “internalized IT as

competitive advantage,”

or the “80/20 rule” o top

clients covered, or the “cross-selling driven by M&A advice.”

We believe the challenge

is worth it and, most o all,

urgently required by currentcircumstances.





43

A New Playbook: 10 Steps Toward Industrialization

From the “inancialization” o

industry, preached and practiced

by many strategic consultancies

at the turn o the century

(with such success stories as

Enron), the banking system

has to move collectively in theopposite direction, towards the

“industrialization” o inance.

Benchmarking with global, best-

in-class manuacturers could

be a good start; they had to

reinvent themselves a numbero times simply to survive, and

they can now demonstrate some

examples o truly successul

transormation – not just to the

beneit o their shareholders

and top managers, but also to

the beneit o their customersand to the global economy.

GIBs should be at the oreront

o such a move or a number o

reasons:

• Their top line is decreasing

rapidly, as are their customers(because o the misapplication

o the “80/20 rule”). Also,

the breadth and depth o their

traditional oering is shrinking

because o regulation oten

uelled by media and client

backlash;

• Their bottom line is gettingmore rigid and thus more

unsustainable with each

passing quarter, despite the

cost-cutting programs that

have negatively impacted their

intangibles and brand equity.

And, ater several rounds o cuts, they still do not seem

able to close their productivity

gap;

• Their goodwill (as measured

by the expected growth rate,

by the required cost o capital,or by sustainable “price/

earnings” commanded in the

market) is at one o the lowest

points in history and they

are unlikely to improve it by

staying the course.

To overcome, GIBs should lead

the way, boldly and proactively,





44

TABLE 21: 10 STEPS TOWARD INDUSTRIALIZATION

Top 10 Priorities

Main Area of Impact

Revenues

1 “Smart” Investment Banking

2Mid-market extension

3Proactive restructuring

4New intermediation corridors

5Continuous innovation

6 Internal marketplace

development

7 Sharing and pooling of platforms

8Productivity benchmarking

9Objective strategic advice

10New culture and people

Costs Risk & CapitalReputation /

Brand Equity

and oster an industrialization o

their main business – or the

beneit o their stakeholders ando the global economy.

To do more with less, we

propose the ollowing Agenda

o 10 Top Action points(table 21):

Five main actions could be

considered and realized in theshort to mid term to impact the

top line:

• “Smart” investment

banking. Forging alliances

with small inancial institutions

groups (FIGs) and othercommercial bank partners

could allow GIBs to exploit

their customer bases and

branch networks, to reach SMEand private/top aluent clients

previously not addressed (or

at least not with the GIBs’ own

coverage/origination model).

This could allow (as in many

other manuacturing industries

– now thanks to the revolutionbrought by 3D-printing) GIBs

to reach millions o customers,





45

with billions o personalized

products mostly tailored (or

collaboratively created, asmade possible today through

digital media and mobile/

tablet banking) at the point

o use, with an extremely

sensible value-or-money

proposition and an ability

to leverage production anddistribution acilities that are

already in place. For clients,

this could result in new and

better choices and solutions.

For GIBs and their partners, it

could produce new sources

o revenue and in turn ignitenew innovation in product

development and service

delivery;

• Mid-market extension.

Consistent with the previous

proposition, GIB players couldreconsider the application o

the “80/20” rule addressing

speciic segments and markets

that, rom time to time, may

present opportunities. Just

as global manuacturing has

addressed speciic ethnicgroups, regional markets, or

a combination o both in a

swit and eective way, the

GIB industry should look to

enhanced methods o marketsegmentation. For example,

small to mid-sized FIGs may

soon require M&A advice,

inancial restructuring, asset-

liability management (ALM)

rebalancing and equity

recapitalization (not to mentionassistance with the high

volume o new and complex

regulations). GIBs could

thereore oer a ull “virtual

CFO” service, leveraging their

heavy and hyper-qualiied

internal structures andtransorming them rom cost

centers into proit centers;

• Proactive restructuring.

Given the global economic

outlook and the long journey

still ahead, one o the ewmarkets that will likely keep

growing is restructuring –

or inancial and real estate

assets, operating companies,

and entire countries. The GIB

industry could play a bigger

role in that, leveraging itsinternal inancial and risk

management skills, global





46

scope, and relevance in

addressing issues that

transcend any individualreorganization. In this way,

GIBs could directly and

critically participate in the

optimal global reallocation o

viable resources that are still

tied to troubled situations –

the most undamental unctiono the global inancial system.

We believe there is a great

“alpha” in this activity, with no

need o principal inance or

strong leverage to enhance it;

• New intermediationcorridors. New

intermediation opportunities

should be sought and

realized as a way to exploit

new revenue opportunities

and perorm ewer relevant

inancial unctions in aneective and eicient way.

Two major imbalances are

clearly visible and only partially

addressed by investment

bankers. The irst, geopolitical

in nature, concerns the

intermediation o the “old/stock-based wealth” o

developed countries with the

“new/low-driven” wealth

o emerging and growing

countries. The second,intergenerational in nature,

concerns the retiring baby

boomers vis-à-vis uture

generations who are unable

to sustain the social saety

nets given the demographic

projections or Europe, theU.S., and Japan, just to name a

ew. The huge reallocation o

resources that needs to take

place could be driven in

a better way by markets,

and any market-based

solution would beneit romthe expertise o the global

investment banks.

• Continuous innovation.

Success, in most industries,

is driven by innovation. GIBs

have seen a great deal o innovation, particularly given

the top talent the industry

attracted during the pre-

crisis era. However, there is

a catch. Innovation can be

premised on the wrong goals

(such as exploiting asymmetricinormation or easy short-

term inancial beneits),





47

or it can be motivated by

healthier concerns (such

as innovating to beneitclients or to create a more

stable path o value creation

or the longer term (see

other global manuacturing

industries, e.g. personal

computing). Reerring back

to the undamental unctionso GIBs, the industry will have

to ocus more on solving hard

problems or its end users. For

instance, leveraging digital

innovation and its “digital

wallet” application could lead

to more eicient consumertransactions. Wherever there is

an ineicient industry activity,

there may be an opportunity

or GIBs. This could include

asset management, guarantee/

hedging products, and

advisory services aroundALM and amilies’ inancial

lie cycles as an alternative to

standardized, unsustainable

pension systems.

Three additional points could be

considered and realized in theshort to medium term to impact

GIB bottom lines:

• Internal marketplace The

development o an internal

market system, able to pricethe contribution o any

business or service unit to the

open market, is an important

prerequisite to the break-up

and unbundling o most (now

ully integrated) value chains.

An internal marketplace wouldmean more transparency or

the top management and the

inancial community, clearer

targeting and accountability o

key managers, and the end o

overly complicated subsidies

that were born in the wakeo the inancial-supermarket

management phase. Even

Sandy Weill, the ather o

“everything under the same

(Citi) umbrella,” has now come

out in avor o some kind o

rerun o the Glass–Steagall Act!Customers may appreciate the

ability to buy everything rom

the same supplier, but they

would appreciate it even more

i all the single components

were proposed at their “true”

price. Digitalization mayinevitably lead the way to this

tipping point.





48

• Sharing and pooling of

platforms. The case or

sharing, pooling, or evenully outsourcing most o the

IT, back oice, and other

service and production

platorms is extremely

compelling. At this point, i t’s

just a matter o how (across

business divisions or among

multiple players), o where

(in their home markets or in

the “cheapest to deliver”

markets), and when (the irst

mover will likely be prompted

by orce majeure, and then

we would expect the others

to quickly ollow). As with

other industries (rom car

manuacturing to aviation,

rom telecom to retail), the

banks best positioned to

succeed will be led by a tightocus on strategic execution

o win-win solutions that

beneit all stakeholders,

rom customers to shareholders

to regulators. Reverting to

M&A alone won’t suice;

solutions need to be createdto it the unique situation o

each bank.

• Productivity benchmarking

and revised compensation

systems. In the low-growth,high-volatility developed

world, the name o the game

will be productivity, especially

as businesses grapple with

scarce resources and a

growing number o constraints.

Investment banking, whichhas amously been the last

industry to care about savings

and recycling, will need to

change rapidly, benchmarking

itsel across the ull cost

spectrum with other, savvier

manuacturing industries. Onthe employee side, GIB

players could consistently

integrate the productivity

benchmarking with other

industries. Finally, i the GIB

industry is to evolve into

a “air-play good citizen,”incentives will have to change,

incorporating “sot” variables

such as “ethical behavior”

and “contribution to the irm’s

intangibles.”

Finally, two more points couldbe addressed or the medium-

to-long term strengthening o





49

intangibles – the ranchise and

knowledge capital o GIB players

– to rebuild goodwill:

• Objective strategic advice.

The development o truly

objective “strategic advice”

oering (rather than basic

“agency” M&A, “rubber

stamping” airness opinions,and iscal “optimization”)

will be a crucial step in the

rebuilding o the goodwill o

GIB players (and in shaking o

the negative reputation they

have recently earned). More

than that, strategic advicecould develop proitably,

given the breath o technical

and global expertise GIBs

can muster, with just a little

additional expertise required.

Well-paid objective advice

could pave the way or therequired unbundling and

would nurture a more positive

longer-term relationship

between the bank and its

core clients. Also, some

standardization o the strategic

advice oering would allowgreater access to mid-market

clients, ocusing on “industrial

– organic and inorganic –

components to growth and

proitability” and on “activeinancial balance sheet

management” and “virtual

CFO.”

• New culture and new

bankers. Still, regardless o

how many bright ideas orindustrialization o GIBs CEOs

may think o, nothing will be

achieved and retained or the

long term i the basic culture

o the industry and its people

ails to change – signiicantly.

The aspiring investment bankero the uture will need to ocus

on providing the greatest value

to the client, even i it requires

third-party products and

services and even i i it doesn’t

directly contribute to the short-

term proitability o the bank.This investment banker will

have more industry knowledge

and ewer “inancial rocket

scientist” ambitions. And

rewards will have to be

calculated accordingly.





50

To borrow rom Mark Twain,

the rumors o the industry’s

death have been greatly

exaggerated. However, to stay

alive, GIB players must make

bold decisions now.

Leverage is neither as cheap

nor as available as it once was.

Principal inance is better let

to “shadow players,” where

the risks are localized andmanageable. Conlicts o

interest are also now o–limits,

and inancial “steroids” must be

abandoned permanently, under

the watchul eyes o revitalized

regulators.

As revenues continue to

shrink, cost structures continue

to become more and more

unsustainable, and capital and

other compliance requirements

continue to increase, GIBs will

need to choose between twopaths:

• On one path, GIBs will work

harder to ind new “tricks” and

“sweet-spots,” while lobbying

the relevant political parties.

This is precisely what many

advisors are now suggesting;

• On the other path, GIBs will

have to ind a new way o

doing business, even i it

requires diicult decisions

and revolutionary thought andaction.

We recommend the second

path.

A global sector that was once

synonymous with ortune andglory now risks losing both.

The industry will have to

work proactively to consider

competitive propositions that

anticipate the substance i not

the letter o Volcker’s, Vickers’,

Liikanen’s and Barnier’s moves.The break-up and unbundling

o GIB business models could

Winning The Game: The Future o Investment

Banking





51

enable the industrialization o

the industry.

A lot o “sot” restructuring

and “hard” innovation will be

required to allow this successul

transormation, as has already

happened in other heavily

hit industries, rom steel to

publishing. Most important, theeasy proits o the pre-crisis era

premised on opaque prices,

illiquid inances, dislocated

markets, and troubled customers

must be abandoned as a

sustainable model or the uture.

Time is short and missteps could

be atal. A balanced approach

should integrate an attention to

bottom-line productivity, an

understanding o the need

or innovation, a ocus on the

technical “nuts and bolts,” and anability to recruit and retain talent.

An evolution based on sounder

values and harder training – and

not on short-term perormancealone – is required to get the

industry not just back on track

but on a viable path to the uture.

Like so many beore it, the global

investment banking industry

must inally ace its own Industrial

Revolution.





52

Claudio Scardovi, the author o

this report, is a managing director

o AlixPartners who specializes

in the FIG sector in the EMEA

markets. Claudio has 18 years o

experience in the inancial services

sector, having worked as senior

partner and managing director

or strategic and industrial global

consultancies and or American

and Asian investment banks and

private equity unds. Claudio has

also been a serial entrepreneur

who has launched a number o

companies providing proessional services and investing in the FIG andreal estate sectors. Claudio is Proessor o Financial Systems at Bocconi

University and visiting proessor at SDA Bocconi, in Milan, where he

has taught Capital Markets. He has written 12 books (three o which are

inancial thrillers authored under the pen name John Stitch) and more

than 200 papers, essays, and articles on the most relevant strategic,

industrial, and inancial subjects global acing FIGs today. He has beennamed by Euromoney as one o the top 200 FIG advisors worldwide

or several years running. He is also a requent lecturer at industrial and

proessional associations.





53

For urther inormation, please contact:

Claudio ScardoviManaging Director

[email protected]

+39 02 360 12018

C.V. Ramachandran

Head o Asia and Managing Director

[email protected]

+852 2236 3550

Special thanks to Paolo Angeloni, Marcello Bellitto and

Paolo Pucino for their support.

About AlixPartners

AlixPartners conducts a broad range o surveys and research in

industries around the globe. To learn more about our publications, or

to contact the AlixPartners proessional nearest you, please visit

www.alixpartners.com/whatwethink.aspx.

AlixPartners, LLP is a global business advisory irm oering

comprehensive services in our major areas: enterprise improvement,turnaround and restructuring, inancial advisory services, and

inormation management services. The irm was ounded in 1981 and

can be ound on the Web at www.alixpartners.com.

Steano AversaCo-President and Managing Director

[email protected]

+44 20 7098 7569

Bob Hedges

Managing Director

[email protected]

+1 (617) 692-2801





54

REFERENCES

Additional data rom the ollowing sources were used in the analysis underlying the

conclusions reached in this paper.

FINANCIAL REPORTS (2007 TO 2011) AND OTHER COMPANY-RELEASEDINFORMATION

Bank o America, Barclays, BNNP, Citigroup, Credit Suisse, Deutsche Bank, GoldmanSachs, HSBC, JP Morgan, Morgan Stanley, Nomura, Royal Bank o Scotland, StandardChartered, Société Générale, UBS, Bear Sterns (2007), Lehman Brothers (2007), Merrill

Lynch (2007), Banca IMI, BTG Pactual, Evercore, Jeeries

OTHER SOURCES

Al Jazeera. (2012, October 30). UBS to Lay O 10,000 Employees. Al Jazeera.

BBC. (2012, September 28). Bank o America Pays $2.4 Billion to Settle Merrill LynchLawsuit. BBC.

Brush, S. & Hopkins, C. (2012, November 15). Corzine Decisions Felled MF Global,

House Republicans Say. Bloomberg.

Cerulli Associates. (2011, October 27). MFEA IDC Forum; Distribution Evolution.

Comort, N. & Weisbach, A. (2012, August 1). Deutsche Bank Cuts Pay as Workers SeeFewer Exits. Bloomberg.

Daneshkhu, S. & Jenkins, P. (2012, January 5). SocGen Plans to Cut Investment Sta.Financial Times.

Credit Suisse (2011, September 15). European Banks

Spick, M and O’ Connor, M. (2012, August 30). Global Investment Banking: IndustryUpdate. Deutsche Bank.

Farrell, M. (2012, July 13). JP Morgan’s Trading Loss: $5.8 bill ion. CNN Money.

Farrell, M. (2012, August 15). Wall Street Prepares or More Layos. CNN Money.

FEACO. (2011). Survey o the European Management Consultancy 2010/2011.

Griin, D. (2012, July 19). Citigroup Said to Plan 350 Job Cuts in Securities Division. Bloomberg.





55

NASDAQ. (2012, October 5). FT: Morgan Stanley Plans More Job Cuts, SmallerBonuses. NASDAQ.

Michael Page. (2012). Financial Services Salary Survey 2012.

Rothacker, R. (2012, September 20). BoA cutting 16,000 jobs by year end in cost-planacceleration: WSJ. Reuters.

Mollenkamp, C. and Wol, B. (2012, December 11). HSBC to pay record $1.9 billionU.S. ine in money laundering case. Reuters.

Schäer. D. (2012, September 6). Investment Banks Eye Europe Job Cuts. Financial

Times.

Scuman, M. & Slater, S. (2012, November 5). HSBC ears U.S. Money LaunderingFines to Top $1.5 billion. Reuters.

SEC (2012, November 16). SEC charges J.P. Morgan Securities LLC with misleadinginvestors in RMBS oerings.

Stenger, I. (2012, August 15). Tallying Up U.S. Regulators’ Money-Laundering Fines. The

Wall Street Journal.

Thomson Reuters. (2011). Equity Capital Markets Review - Full Year Review 2011.

Thomson Reuters. (2011). Global Investment Banking Review - Full Year Review 2011.

Wall Street Comps Survey. (2007; 2011). Annual Investment Banking CompensationSurvey.

Wilson, H. (2012, April 25). HSBC Targets Back Oice Workers in 2,000 UK Job Cuts.

The Telegraph.

Viswanatha, A. (2012, February 10). U.S. Banks Agree to $25 Billion in HomeownerHelp. Reuters.

Zacks Investment Research. (2012, September 24). Nomura Announce s Job Cuts. Zacks

Investment Research.





56


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arising rom or in connection with any use o the White Paper.

Statements and opinions expressed in this White Paper relect conditions andour views as o this date, all o which are subject to change. We undertakeno obligation to update or provide any revisions to the White Paper to relectevents, circumstances or changes that occur ater the date the White Paperwas prepared. In preparing the White Paper, we have not acted on anyinstructions rom any o the Global Investment Banks reerenced herein andwhile every care has been taken in the compilation o this inormation andevery attempt made to present up-to-date and accurate inormation, we cannot

guarantee that inaccuracies will not occur. In preparing this White Paper,AlixPartners has relied upon and assumed, without independent veriication,the accuracy and completeness o all inormation available rom public sourcesor which was otherwise provided to us. AlixPartners has not audited or veriiedthe data reviewed in connection with the preparation o this White Paper.

This White Paper may be based, in whole or in part, on projections ororecasts o uture events. A orecast, by its nature, is speculative and includesestimates and assumptions which may prove to be wrong. Actual results may,

and requently do, dier rom those projected or orecast. Those dierencesmay be material. Items which could impact actual results include, but arenot limited to, unoreseen micro or macro economic developments and/orbusiness or industry events.

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