The End of Investment Bank Capitalism?An Economic Geography of Financial Jobsand Power

Dariusz WójcikSchool of Geography and

the Environment andSt. Peter’s College,Oxford University

South Parks RoadOxford OX1 3QYUnited Kingdomdariusz.wojcik@spc.ox.ac.uk

Key words:investment bankingsecuritizationfinancial crisis

abst

ract This article investigates employment patterns, remu-

neration, and power relations in the U.S. financialsector between 1978 and 2008. It demonstrates thatinvestment banking has played a central part in thesecurities industry, which has been by far the mostexpansive segment of the U.S. financial sector and asignificant contributor to growing income inequality.The power of investment banking has risen over thepast 30 years under the conditions of the growingdemand for investment services, technologicalchanges, deregulation, and globalization. Investmentbanks were at the heart of the shadow bankingsystem, inventing many of the products used by it andoften disguising its operation, thus contributing deci-sively to the outbreak of the global financial crisis of2007–9. With leading U.S. investment banks con-verted into bank holding companies and the threat ofreregulation, the future of investment banking isuncertain. One area of uncertainty is the banks’ rela-tionship with sovereign wealth funds, which involvesboth opportunities and challenges. The article identi-fies the economic geography of investment bankingas one of the keys to understanding the dynamics ofthe contemporary world economy and promotes amesolevel approach to geographies of finance.ecge_1162 1..24

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Acknowledgments

I thank Adam Dixon andother participants of theseminar at Bristol Universityin February 2011, where Ipresented the initial versionof this article. I also thankGordon L. Clark for hiscomments.

A lot of people used to think that Goldman Sachs ran theU.S. economy. Now we know it does. (John Gapper,Financial Times, 24 September 2008, 1)

Economists, particularly financial economists, whodiagnosed the global financial crisis (GFC) 2007–09cannot come to terms with the role of financial firmsand professionals. In contrast to the media, which areeager to criticize banks and bankers, economists havetypically looked for the causes of the crisis in moreabstract and structural factors, such as the failure ofunrestricted financial markets (Stiglitz 2010), irratio-nal behavior of investors (Shiller 2008), or globaltrade and financial imbalances (Rajan 2010). Atten-tion to banks and bankers seems to be inconsistentwith the received wisdom in economics, according towhich in the past three decades or so, we have wit-nessed a process of disintermediation, with the centralrole of banks collecting deposits and granting loansreplaced with investors and borrowers exercisingdirect access to capital markets (Mishkin 2006).Building on the received wisdom of disintermedia-tion, the emerging narrative of the GFC in economicsfocuses on the interconnected and complex natureof finance. Financial institutions and markets, thenarrative goes, have become more interconnected, andfinancial instruments have become more complex,increasing the severity of tail risks (events with a lowprobability but potentially disastrous consequences),also referred to as “black swans” (Taleb 2008). Gov-ernments, regulators, and scientists have not kept pacewith the developments, and hence the crisis. Therhetoric of disintermediation and its younger sistercomplexity makes the financial system appear to bemade of abstract market forces and anonymous actors,whose identity by implication becomes a negligibleissue (Christophers 2009).

A large scholarship, however, has opposed the viewof the financial sector as a mere intermediary, which,given the purported process of disintermediation, isfading into the background of economy. Politicaleconomists and other social scientists, particularly onthe radical side of the field, have, for a long time,placed the financial sector at the center of powerrelations shaping the U.S. and international economy,with the proliferation of such terms as the WallStreet–Treasury–IMF (International Monetary Fund)complex (Bhagwati 1998) or the new Wall Streetsystem (Gowan 2009), not to mention the broaderdebate on neoliberalism (Harvey 2011). Elsewhere, a

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burgeoning interdisciplinary field of financialization studies has documented and issuedwarnings about the excessive and harmful role of finance in economic and social life(Epstein 2005; Froud, Johal, Leaver, and Williams 2006; Engelen et al. 2011; Savage andWilliams 2008). While the GFC has served as at least a potential validation of criticalpolitical economy and financialization studies, the problem shared by both of theseapproaches is the underspatialization of finance, with insufficient attention paid to spaceand place, in terms of both processes and effects (French, Leyshon, and Wainwright2011). How does financialization spread across space? What role do particular places playin the process? What is the impact of financialization in particular places? These andmany other questions still await satisfactory empirically rich answers.

The objective of this article is to contribute to studies that spatialize understanding offinancialization, by focusing on employment, remuneration, and power in the U.S. finan-cial sector. The article deconstructs the recent evolution of the U.S. financial sector usinga forensic “onion-peeling” technique. The theoretical framework follows the introduc-tion. The empirical part starts by analyzing employment in the financial sector between1978 and 2008 in the United States, as a whole, and in its financial center—Manhattan.This analysis helps pin down the securities industry as a subsector that has been key to thephenomenal growth of finance in terms of employment and salaries over the past threedecades and a major contributor to growing income inequality between financial andnonfinancial jobs, between Manhattan and the rest of the United States, and withinManhattan itself. Then, the structure of the securities industry is analyzed, identifyinginvestment banking as its elite and sketching the main factors that contributed to thephenomenal rise of investment banking and its transformation. The next part considers thegrowth of the securities industry in major economies other than the United States,highlighting the international spread of investment bank capitalism, followed by asummary of the role of investment banking in the GFC, which asks whether we arewitnessing a significant erosion of the power of investment banks. The final sectionpresents a summary of the results and directions for further research.

The main implication of the article for economic geography is that the study ofinvestment banking as an industry is one of the keys to understanding the past threedecades in the history of capitalism and its future, not least the causes and consequencesof the GFC. Although investment banking has been of much interest to economicgeographers, most studies have focused on the specific products or practices of investmentbanks (e.g., S. Hall 2007); investment banks as agents of neoliberalism (e.g., Leyshon andThrift 1997); mobility of investment bankers (Beaverstock 2007); or investment banks asillustrations of various aspects of globalization (e.g., Jones 2002). More effort is requiredto study the structure of the industry and its position and power in the economy andsociety within and between countries and financial centers. Investment banking may beinvestigated as the elite of the financial sector, but also as the entire producer servicessector. No other professional group in the producer services sector is rewarded so highlyand has a comparable level of access to and interaction with corporate executives. Giventhat the community of geographers who are studying finance is relatively small, a focuson investment banking offers great leverage and the potential to contribute to the socialscience of finance.

The article has a normative implication in addition to supporting the view ofpower as something made and remade, rather than structural and independent fromanyone’s will, underpinned by the position of the financial sector at the center of thecircuits of capital (Allen 2009). It documents that investment bankers became thefinancial elite in the past decades, using their role in the global financial system to skewrewards in their own favor. This reading of finance opens up space for political

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engagement and makes plausible the question about the end of investment bank capital-ism and the future beyond it.

An Economic Geography of Financial Jobs and PowerEmployment and power are central foci of research in economic geography. Emphasis

on employment can be grounded in the Keynesian tradition, which treats it as the keyeconomic variable. Gainful employment is the principal way in which people and soci-eties sustain themselves, and the creation of new jobs offers multiplier effects for the restof the economy (Skidelsky 2010). Interest in power can be rooted in the Marxist tradition,viewing economic activity as underpinned by social relations, which, by nature, involveunequal power (Singer 2000). Positivist quantitative economic geography, which focuseson the location of economic activity, has involved mapping employment and factors thataffect its distribution (Dicken and Lloyd 1990). Marxist economic geography has uncov-ered how unequal power relations are inscribed in space (Harvey 1973).

A remarkable synthesis for the treatment of employment and power was offered byDoreen Massey (1995), who promoted the perspective of economic geography thatcombines the analysis of the spatial distributions of economic activities with appreciationthat these distributions act as both the causes and consequences of power-filled socialrelations. This dual strategy is necessary. On the one hand analyzing spatial distributionsfor their own sake may lead to spatial reductionism and fetishism. On the other hand,analyzing power relations without consideration for spatial distributions deprivesresearch of its geographic focus, making it hardly distinguishable from sociology orpolitical science. As Massey put it, “geography is not just a product of social relations; itis an integral part of their development” (120).

Massey’s (1995) call for an integrated exploration of both quantitative and qualitativefootprints of employment and power has arguably not met a response it could or shouldhave met. More econometrically minded geographers and economists have been attractedto geographic economics, which analyzes employment patterns in its quest to explainspatial agglomeration and specialization, but has little to say about power (Brakman,Garretsen, and van Marrewijk 2009). Spatial proximity in this approach tends to befetishized, with little appreciation for the fact that spatial separation of economic activitiescan play an important function in economic decision making, such as helping executivesundertake radical restructuring and downsizing of corporate operations in places far fromtheir homes (Landier, Nair, and Wulf 2009). On the other hand, power remains central toa cultural economy perspective in economic geography, which has provided sophisticatedtheories on the spatiality of power but has not nurtured an interest in the systematicmapping of employment patterns (Amin and Thrift 2004).

In this article, I attempt to reengage with Massey’s (1995) idea to combine the analysisof employment patterns and power by focusing on finance, probably the most controver-sial economic sector of the early twenty-first century. Power is understood broadly as theeconomic, political, and cultural influence of the financial sector. It is based on the softpower of consent, persuasion, and intellectual leadership, rather than on corruption orcoercion (Arrighi 2010). Power and its spatiality can be gleaned from the analysis oftrends in employment and remuneration, as well as a functional analysis of relationshipswithin and outside the financial sector. This inquiry is enhanced with the analysis of theimpact of regulation and technology, ultimately helping to identify and locate the part ofthe financial sector and places where power is concentrated and from which it emanates.

The article presents a mesolevel approach to employment and power in finance, placedbetween the microlevel approach of anthropology, focused on the everyday life of finance

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(Randy Martin 2002; Langley 2008), and the macrolevel approach of political economy,which views financialization as a stage of financial capitalism (Arrighi 2010). The use ofa mesolevel approach is not novel in itself. After all, the principal strategies of theestablished literature on geographies of finance have been to break down nationalfinancial spaces (or systems) into subsectors, groups of companies, and centers offinancial activity and to study them through intra- and international comparisons (Clarkand Wójcik 2007; Ron Martin 1999; Leyshon and Thrift 1997). What is original, however,is the combination of the analysis of employment, remuneration, and power in a historicaland spatial context and the application of this analysis to investment banking.

The mesolevel approach to the geography of finance modeled after Massey (1995) hasthree key advantages. First, combining the analysis of spatial patterns and power relations,it considers both structure and agency without privileging one over another. Second, byfocusing on employment and remuneration, it roots finance in the real economy, ratherthan cultivating a view of finance that is disconnected from the real economy, which leadsalmost inevitably to the neglect of space and place. By extension, studying employmentand remuneration is a crude but important way to investigate the impact of the financialsector on uneven development. Finally, it is an approach that considers the spatial andeconomic but also the political, social, and cultural, thus satisfying the call for anintegrationist approach to finance (Pike and Pollard 2010).

The article is most closely related to work in financial geography and studies offinancialization. Particularly important sources of inspiration include Leyshon andThrift’s (1997) study of the restructuring of the British financial sector in the 1980s andKrippner’s (2005) work on employment and the profitability of U.S. financial firms. Myambition, however, goes beyond a contribution to financializing economic geography orspatializing research on financialization. It is rather to demonstrate that even a relativelybasic exploratory analysis of finance as an industry, focused on employment and powerrelations, can contribute to the diagnosis of the global financial crisis 2007–09. Specifi-cally, such an analysis can help us identify the securities industry, particularly investmentbanking, as a hotspot of power that was instrumental in generating the crisis and whosepotential restructuring in the wake of the crisis may lay the foundations for a majortransformation of the world economy in the 21st century.

The Rise of the Securities IndustryTo situate investment banking in the U.S. financial sector and economy, I investigated

the transformation of the U.S. financial sector in terms of employment and payrollbetween 1978, the eve of financial deregulation of the Reagan era, and 2008, the peak ofthe GFC. The financial sector is defined broadly, consisting of four three-digit NorthAmerican Industry Classification System (NAICS) categories and corresponding Stan-dard Industrial Classification categories: credit intermediation and related activities(hereafter the credit sector); securities, commodity contracts, and other financial invest-ment and related activities (the securities industry); insurance carriers and related activi-ties (insurance); and real estate. The credit sector is made of institutions that originateloans (whether they take deposits or focus solely on the origination of loans like mortgageoriginators or credit card companies). The securities industry deals with the production,distribution, and exchange of securities, including bonds, equities, asset-backed securi-ties, and derivatives. The data came from the County Business Patterns database of theU.S. Census Bureau, which is collected on an establishment basis. To give an example, forJPMorgan, which is a bank holding company covering both credit and securities activities,the employment and payroll in each office was assigned to each location and classified

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according to the primary activity of the office. Employment data were for mid-March ofa given year, and payroll data were the total annual payroll (including bonuses). No dataare available on the breakdown of employment between the front and back offices orbetween the managerial and clerical levels. The data do not include self-employedindividuals, employees of private households, railroad and agricultural employees, andmost governmental employees. In the analysis, data have been used for all years between1978 and 2008. The discussion that follows focuses, for the sake of brevity, on compari-sons between 1978 and 2008.

A sequence of analytical steps revealed a major change in the position and structure ofU.S. finance. The share of finance in total employment (see Figure 1) remained remark-ably stable at 6.6 percent in 1998 and 2008, fluctuating within a narrow band of 6.4percent to 7.1 percent during the period. Within finance, however, the securities industrygrew significantly at the expense of credit and insurance, with absolute employment risingfrom 177,000 to 974,000, and its share from 0.3 percent to 0.8 percent of U.S. employ-ment. In contrast to the stable employment share of finance, its share of the total payrollrose gradually from 6.7 percent in 1978 to 11.3 percent in 2008 (see Figure 2). The maincontributor to this rise was the securities industry, which evolved from the smallest to thebiggest payer in finance, raising its share from 0.5 percent to 3.6 percent. Over the pastthree decades, the payroll per person (salaries) in finance lost touch with that in the restof the U.S. economy (see Figure 3). In 1978 an average finance professional earned only2 percent more than an average nonfinance worker; 30 years later, he or she earned 81percent more. Thus, in the past three decades, a finance worker gained, on average, a 2percent per year advantage in pay over a nonfinance worker. Put differently, while thepurchasing power of an average U.S. salary outside finance did not increase at all, that infinance increased by 77 percent (see Figure 4). Within finance, the securities industry was

Figure 1. Shares of finance, insurance, and real estate (FIRE) in U.S. employment. Source:Author, based on data from County Business Patterns.

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a definite leader of pay increases. While in 1978, an average worker in the securitiesindustry earned twice as much as a nonfinance worker; in 2008, he or she earned nearlyfive times more. In fact, in 2008, there was no single NAICS category, however small andselect, which was anywhere near the average payroll of $189,000 in the securities industry(see Figure 5).

If one zooms in on Manhattan (New York County), the home of Wall Street, one seesfurther dimensions of the transformation in finance. While the share of finance in

Figure 2. Shares of finance, insurance, and real estate (FIRE) in the U.S. payroll. Source:Author,based on data from County Business Patterns.

Figure 3. Average payroll per person in the financial sector in relation to nonfinancial jobs.Source:Author, based on data from County Business Patterns.

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Manhattan’s employment fell from 19.6 percent to 18.6 percent (peaking at 22.8 percentin 1988), the securities industry evolved from the smallest to the majority employer withinfinance (see Figure 6). In 2008, the securities industry employed 198,000 people—morethan in the credit, insurance, and real estate sectors combined. The change in the payrollwas dramatic. The share of finance in Manhattan’s payroll grew gradually from 21.4percent to 46.2 percent and that of the securities industry alone rose from a mere 5.9percent to 34.3 percent (see Figure 7). Representing less than 10 percent of Manhattan’sworkforce, the securities industry accounted for more than a third of its total pay packageand nearly three-quarters of the payroll in finance. In 1978, even in Manhattan a job infinance was not special. The average salary in finance was only 13 percent higher than that

Figure 4. Percentage change in the real average annual payroll per person 1978–2008. Source:Author, based on data from County Business Patterns.

Figure 5. Average annual 2008 payroll per person in selected industries (in US dollars, thousands).Source: Author, based on data from County Business Patterns.

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Figure 6. Shares of finance, insurance, and real estate (FIRE) in Manhattan employment. Source:Author, based on data from County Business Patterns.

Figure 7. Shares of finance, insurance, and real estate (FIRE) in the Manhattan payroll. Source:Author, based on data from County Business Patterns.

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in nonfinancial jobs (see Figure 8). By 2008 it was 273 percent higher, due mainly to therise of the securities industry and salaries in this industry. It it interesting that although theshare of Manhattan in employment in the U.S. securities industry fell gradually from 36percent to 20 percent, its share of the payroll remained stable at approximately 40 percentthroughout the period (see Figure 9). The higher share in payroll than in employmentreflects the fact that Manhattan serves as the center of the securities industry, hosting thebest-paying jobs and commanding the industry’s expansion in the rest of the country andinternationally. In fact, in 1978, the average salary in the securities industry in Manhattanwas only 13 percent higher than in the rest of the United States, but by 2008, it was 160percent higher—evidence of the major centralization taking place in the industry itself.

To summarize, the main process revealed by employment and payroll patterns is thephenomenal rise of the securities industry. During the three decades under consideration,conventional securities like equities and bonds grew in significance, derivatives marketsdeveloped and expanded, with securitization extending also to loans (including mort-gages), hitherto considered an exclusive business of the credit sector. Although there is arich literature on these processes, not to be repeated here (e.g., Wójcik 2011b; Leyshonand Thrift 2007), this section shows that they had a clear impact on the basic geography

Figure 8. Average payroll per person in the financial sector in relation to nonfinancial jobs inManhattan. Source: Author, based on data from County Business Patterns.

Figure 9. Share of Manhattan in the total employment and payroll in the securities industry.Source: Author, based on data from County Business Patterns.

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of U.S. employment. It would be more precise to say that the U.S. economy has beensecuritized rather than financialized. The GFC is closely related to the boom in houseprices, but the rise of employment and salaries in the real estate sector was modestcompared to that in the rest of finance and negligible in comparison to the securitiesindustry. The analysis also indicates that Manhattan was transformed from a generalfinancial services center to a specialized securities industry center. The booming securi-ties industry has contributed significantly to growing income inequality between financialand other jobs, between Manhattan and the rest of the United States, and within Manhat-tan. The industry established itself at the top of the pecking order of U.S. industries interms of remuneration per person, higher than any other professional business service,knowledge economy sector, or creative industry.

The rise of the securities industry was not necessarily a direct or main cause of incomeinequality in the United States. Future studies on this issue, however, should consider therise of the securities industry as an important factor (Warf 2004). Rhaguram Rajan (2010),the former chief economist of the IMF, rightly pointed to the growing income inequalityas a major fault line of the U.S. economy and one of the structural factors behind the GFC.However, he did not make a connection between income inequality and the excesses in thefinancial sector. This problem highlights the virtue of a mesolevel approach. By analyzingemployment and remuneration patterns in different subsectors of finance over time andacross space, economic geography can contribute to the study of both the causes andconsequences of the GFC.

Inside the Securities IndustryHaving identified the securities industry as the engine of financialization in the U.S.

economy, I now analyze its structure. Some refer to any intermediation in the securitiesmarkets as investment banking, but this is a crude simplification (Morrison and Wilhelm2007). First, one needs to distinguish between the sell side and the buy side of thesecurities industry (see Figure 10). The sell side works primarily with the issuers ofsecurities, including corporations issuing stocks and bonds; federal, state, and municipalgovernments issuing bonds; and banks originating loans to be securitized. The buy sideworks primarily with investors, individual and institutional. In between are exchangefacilitators, mainly in the form of exchanges (stock and commodity) and clearinghouses(Harris 2003). In 2008, the sell side, buy side, and exchange facilitators had 534,000,432,000, and 8,000 employees, respectively.

Defined narrowly, investment banking is restricted to the sell side, focused on under-writing the issuance of new securities; trading securities on their own account (dealing)and on behalf of others (brokerage) to create and sustain the secondary markets forsecurities; and rendering advisory services to issuers, including mergers and acquisitions.

Figure 10. The basic structure of the securities industry. Source: Author.

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To be sure, there are firms on the sell side that cannot be referred to as investment banksbecause they focus on brokerage (e.g., Charles Schwab) or securities dealing (e.g.,Tradebot) without being active in primary markets (i.e., participating in the production ofnew securities). The buy side, often referred to as the asset management industry, consistsof firms that manage investment funds (pension, mutual, hedge, venture capital, andothers) and investment advisers, which advise fund managers and other individuals andfirms, but, in contrast to fund managers, do not make actual investment decisions. Broadlydefined, investment banking crosses the boundary between the sell side and buy side, withinvestment banks rendering fund management and investment advisory services. In 2009,both Goldman Sachs and Morgan Stanley were among the top 50 largest fund managersin the world according to the value of the assets under their management (Towers Watson2011). Investment banks also act as exchange facilitators, since, under certain conditions,they are allowed to internalize sell and buy orders from their customers, matching themin-house, instead of sending them to a stock exchange (Wójcik 2011a).

It should be stressed that although investment banks operate in all parts of the securitiesindustry, firms from the buy side or exchange facilitators rarely enter the sell side of thesecurities industry and do not engage directly with the issuers of securities in primarymarkets. This exclusive involvement in the production of securities gives investmentbanks privileged access to information. To put it bluntly, investment banks can reach anypart of the securities industry, while other securities firms do not reach the mostinformation-rich business of investment banking. This situation makes investmentbanking the core and the elite of the securities industry. The earning power and geographyof the industry reflect its special status. In 2008, the average payroll per person ininvestment banking (defined narrowly because data for the broad definition are unavail-able) was $341,000, nearly twice the average in the securities industry and close to thesalary of the U.S. president. Investment banking enjoyed the highest payroll per person in2008 and the highest growth in payroll per person since 1998 of all categories in NAICS.To put 150,000 investment-banking employees earning an average of $341,000 intoperspective, in 2008, the top 762,000 tax units (the top 1 percent of U.S. families)according to income (excluding capital gains) earned on average $401,000 (Piketty andSaez 2012). These figures give an idea of the contribution of this small professional groupto income inequality in the United States. Investment banking also exhibits the highestgeographic concentration in the securities industry. In 2008, more than 50 percent of allemployees in investment banking worked in Manhattan, compared to less than 20 percentof the employees in fund management and approximately 10 percent of the investmentadvisers. This figure is not surprising, given that Goldman Sachs, Morgan Stanley,JPMorgan, and Merrill Lynch (a part of Bank of America), the largest full-service U.S.investment banks, are all headquartered in Manhattan.

The power of investment banks extends beyond their purchasing power. At least until2008, the leading investment banks would top the lists of the most desirable employersamong graduates. Given the high-pressure working environment and a high turnover ofstaff in investment banking (McDowell 1997), the industry is an important feeder for therest of the financial sector as well as the top strata of corporate executives, and manyformally independent hedge funds and other investment funds are likely to be spin-offs ofinvestment banks. The political power of investment banking is related to the issue of the“revolving door” between Wall Street and the U.S. government and regulatory agencies,exemplified by Henry Paulson and Robert Rubin, both Goldman Sachs executives prior totheir appointment as U.S. Treasury secretaries.As Rajan (2010) argued, even if investmentbankers assume governmental positions with the best of intentions, they are likely tocontinue to think as investment bankers, leading to the problem of cognitive capture.

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Investment banks are also one of the leading donors in U.S. politics, which raises thepotential of regulatory capture (“Obama Top Fundraiser on Wall Street” 2007). It isestimated that between 1998 and 2008, the securities industry spent $500 million oncampaign contributions and $600 million on lobbying (Johnson and Kwak 2010).

Beyond labor markets and politics, investment banks exert their power through ideas.Some of the most influential ways of measuring economic value and risk, as well asinterpreting the map of the world economy, have come from investment banks. Theconcept of the value at risk (VaR), which measures the risk of loss on a specific portfolioof assets, was developed by JPMorgan, has been used widely within the financial sector,and in 2004 was mandated as a method for evaluating market risk by an internationalregulatory agreement known as Basel II (Ferguson 2009). The acronym BRIC was coinedby Jim O’Neill of Goldman Sachs. The term emerging markets originated from researchby the World Bank, but probably the most influential tool for identifying and classifyingemerging markets is a set of MSCI indices, developed by Morgan Stanley. Investmentbanks have also been key promoters of the shareholder value ideology, marginalizing theinterests of other stakeholders in corporations, and focusing on stock prices as theultimate measures of corporate value (Ho 2009).

The deconstruction of the securities industry presented in this section exemplifies thevalue of a mesolevel approach focused on securitization not as an abstract phenomenonattached to an abstract market, but rather “a product” that is delivered by a particularindustry located in particular places (Wójcik 2011b; Leyshon and Thrift 2007). To takethe next step, future research could analyze power relations in the value chains of specificinvestment banking projects, such as the securitization of mortgages. The section alsohighlights the need for an integrationist approach in geographies of finance (Pike andPollard 2010). As I have shown, understanding the role of investment banking requires aneconomic, as well as a political and cultural, analysis.

The Rise to Power and TransformationThe rise of investment banking to power, at the heart of the phenomenal growth of the

securities industry over the past three decades, has been driven principally by four groupsof factors. The first has to do with the rising demand for investment services driven by thegrowth of pension funds, replacing pay-as-you-go pension systems (Clark 2000). Land-mark legislation in this field in the United States was the introduction of 401(k) plans in1980, encouraging individuals to save in these vehicles. In September 2011, 401(k)accounts were estimated to hold assets of approximately $3 trillion, most of which wasinvested in mutual funds (Bloomberg 2011). Investment banks could use this risingmountain of funds to sell fund management and advisory services, but what is moreimportant, funded pensions generate a demand for new securities, the production of whichis the traditional business of investment banking.

The second group of factors involves the introduction of computers and new informa-tion and communication technologies (ICT), as well as formal mathematical investmenttheories, with the modern portfolio theory in the lead. Given the value of information insecurities markets, the industry has always been a savvy user of ICT. The introduction ofpersonal computers and computer networks over the past 30 years had transformativeeffects. It implied significant additional costs, a big part of which is relatively fixed(setting up an internal computer network, external connections, and an IT department),ratcheting up economies of scale present in investment banking, putting pressure onraising capital and encouraging a conversion from partnerships to a corporate legalformat. Technology has also transformed skills and the labor market. Investment bankers

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traditionally learned on the job, acquiring relatively firm-specific skills, encouraging longrelationships between employees and employers (Leyshon and Thrift 1997). Growingcomputing power facilitated the use of mathematical models in finance, increasing therole of entry-level and generic skills; fueling the demand for graduates in science,engineering, and technology; and formal education in finance (such as the MBA).Changes in the nature of skills, combined with a steep demand for labor in the securitiesindustry, accelerated the turnover of staff, and stimulated the development of high-powered incentive schemes, with more performance-based remuneration.

The third and critical factor was deregulation, which allowed investment banks to usenew technology and respond to the increasing demand for investment services in anenvironment that was underpinned by faith in self-regulation in a competitive free market.While financial deregulation in the United States dates back to the 1970s, key acts thataffected investment banking were the gradual repeal of the Glass-Steagall Act between1996 and 1999 and the passage of the Commodity Futures Modernization Act of 2000(Sherman 2009). The former abolished the obligatory separation of investment fromcommercial banking (the securities industry from the credit sector), which had been inplace since 1933. For incumbent investment banks, the abolition meant new competitors,but for its employees and the securities industry in general, it meant opportunities andexpansion, as commercial banks, with Citigroup in the lead, developed large investmentbanking subsidiaries (Johnson and Kwak 2010). The latter act prevented the CommodityFutures Trading Commission from regulating most derivatives contracts that are tradedoutside regulated exchanges, encouraging further innovation and boom in the trading ofderivatives, a growing business of investment banks. New competition and the prevailingparadigm of self-regulation contributed to and legitimated vertical integration in invest-ment banking, including expansion from the sell side into the buy side of the securitiesindustry. Mixing on an increasing scale, services for both sellers and buyers of securitiesand trading on behalf of customers with proprietary trading aggravated conflictsof interests, but these conflicts of interest were believed to be neutralized byinternal controls and “Chinese Walls” within investment banks and bank holdingcompanies.

The fourth group of factors involves the growth of investment banking and thesecurities industry internationally, in that U.S. investment banks set up operations abroad,and securitization and deregulation took hold beyond the United States. A key momentwas the Big Bang of 1986 in the United Kingdom, which opened the U.K. stock marketto foreign banks. From the United Kingdom, the liberalization of securities marketsspread to the rest of Europe, with securitization becoming one of the leitmotifs ofEuropean financial integration driven by the Investment Services Directive (ISD) of 1996and consolidated through the Markets in Financial Instruments Directive (MiFID) thathas been in force since 2007. The ISD introduced a single European passport forinvestment firms, facilitating pan-European operations of both Europe-based and non-European firms. An investigation of cross-border corporate ownership in 2000 showed thedominance of U.S. investors and U.S. investment banks as main intermediaries in theprocess of the integration of the European capital market, leading to the conclusion thatthe process could be referred to as the “Americanization” of the European capital market(Wójcik 2002). The MiFID opened the way for new trading venues to compete withincumbent stock exchanges, and in 2012, it appears that the leading owners of bothincumbent exchanges and new trading venues, as well as their main customers, are theU.S. investment banks and institutional investors (Wójcik 2011a). Beyond Europe, finan-cial liberalization in emerging and developing markets, promoted by the IMF, as well asthe Doha Round of the World Trade Organization negotiations promoting free trade in

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business services, opened further opportunities for investment banking (Stiglitz 2002,Johnson and Kwak 2010).

In sum, over the past three decades, investment banking, the core and elite of thesecurities industry, has grown in size and power and has undergone a transformation. Inthe late 1970s, investment banks were typically small partnerships, specialized in under-writing and advisory services, offering lucrative, mostly lifetime jobs that involvedlong-term relationships with customers and trust building and relatively little science orhardware. Thirty years later, investment banking could not look more different. It isdominated by multinational corporations with diluted ownership structures, someemploying tens of thousands of people, and diversified into all areas of the securitiesindustry. These corporations focus is on trading, based on technology and financialengineering. The employees and executives are remunerated better than 30 years ago andbetter than any other professional group of comparable size in the United States.

If we judge an economic sector by its dynamics, pay packages, or profitability,investment banking is a good candidate for the most successful industry of the past 30years. There are two fundamental concerns, however. First, the shift in focus fromrelationship building and trust to financial engineering and trading suggests a shift toshorter-term objectives and incentives. To be sure, the traditional investment bankingactivities that are focused on corporate finance remain relationship driven, but therevenues they bring have been dwarfed by revenues from trading (Morrison and Wilhelm2007). The second problem is the extent to which the boom in the industry has been drivenby the industry’s political and ideological power. In a study of remuneration in the U.S.financial sector between 1909 and 2006, Philippon and Reshef (2009) demonstrated thatthe high-pay packages of the past decade are related to deregulation and cannot bejustified by the education that is required, the complexity and security of the jobs, or theuse of new technology. They estimated that in 2006, finance professionals were paidapproximately 40 percent too much. Curiously however, they did not pay much attentionto the fact that increases in remuneration in the securities industry dwarfed those in therest of the financial sector. The big question remains: to what degree has investmentbanking and the securities industry been successful at the expense of the rest of theeconomy and society?

Investment Bank Capitalism Outside the United StatesThis article focuses on the United States, but investment bank capitalism is a phenom-

enon that applies to other countries. Although systematic data on remuneration indifferent parts of the financial sector are not available for other countries, the basicfeatures of employment in the securities industry versus those in credit and insurance inthe five largest economies outside of the United States (China, France, Germany, Japan,and the United Kingdom), as well as Switzerland, a major location of financial services,are presented in Figures 11 and 12. Because historical data for China are available only forHong Kong, Figure 11 refers to Hong Kong only, while Figure 12 shows data for thewhole of China, including Hong Kong.

The main observation is that the spectacular rise of employment in the securitiesindustry that was documented for the United States for the period 1998–2008 was not anexception. France, Germany, Switzerland, and the United Kingdom registered muchlarger increases in the absolute size of the industry than did the United States, rangingfrom 42 percent in Germany to 98 percent in Switzerland, and in all these countries, therise of the securities industry overshadowed that in credit and insurance (see Figure 11).In fact, in Germany and the United Kingdom, employment in credit and insurance

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contracted. In Hong Kong, growth in credit and insurance followed that in the securitiesindustry closely, probably because the Chinese market is still far from saturated in termsof basic banking and insurance products. The only exception is Japan, where employmentin the securities industry shrank by more than 30 percent, a figure larger than that in creditand insurance. This decrease may be explained by the dominance of public debt and therelative stagnation of Japanese private finance, including the stock and real estate markets(Koo 2008).

Figure 12 shows the concentration of employment in the leading cities of variouscountries in 2008. It indicates that a higher geographic concentration in the securitiesindustry than that in credit and insurance, found in the United States, was also the case inChina, France, Germany, Japan, and the United Kingdom. Tokyo, for example, accountedfor 22 percent of employment in credit and insurance but 56 percent of employment in the

Figure 11. Change in employment 1998–2008. Source:Author, based on data from the NationalBureau of Statistics of China; Unistatis (France); Bundesagentur für Arbeit Statistik (Germany);Japanese Statistics Bureau; NOMIS, Office for National Statistics (UK); County Business Patterns,U.S. Census Bureau; and Federal Statistical Office (Switzerland).

Figure 12. Concentration of employment in the leading city 2008. Source:Author, based on thesame data as Figure 11.The leading cities are defined as Hong Kong SAR (China), Paris-Ile-de-France (France), Frankfurt am Main-Stadt (Germany),Tokyo–Prefecture (Japan), Greater London(UK), New York–Northern Jersey–Long Island Metropolitan Statistical Area (United States),Zürich-Canton (Switzerland).

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securities industry in 2008. In relative terms, the largest discrepancy between the share ofthe leading city in the securities industry versus that in credit and insurance was found inChina, where Hong Kong, accounting for 2 percent of employment in credit and insur-ance, commanded a 26 percent share in the securities industry. Switzerland, however, didnot follow the pattern, and Germany did so only weakly. Zurich accounted for 46 percentof employment in Swiss credit and insurance, but only 20 percent of labor in the securitiesindustry. In Germany, Frankfurt’s share in the securities industry was only 7 percent,slightly larger than its share in credit and insurance. The securities industry in Germanyand Switzerland are much more spatially dispersed, with Munich and Geneva, both majorasset management centers close competitors to Frankfurt and Zurich, respectively. Thisdispersion of the securities industry reflects a relatively decentralized and multipolarspatial nature of the financial sector in Germany and Switzerland (Klagge and Martin2005).

To be sure, beyond basic employment patterns, there are differences in the structure androle of the securities industry. Continental European countries, for example, have neverhad a formal separation of investment banking from commercial banking, an equivalentof the U.S. Glass-Steagall Act. The model of universal banking was adopted by theEuropean Union, more recently in Japan, and is being considered in China. Barclays,Deutsche Bank, and UBS, for example, have some of the largest investment bankingoperations in the world, and because universal banks are more comparable to Citigroupthan Goldman Sachs or Morgan Stanley. Indeed, one could view the entry of non-U.S.universal banks into investment banking, reflected in Figure 11, as one of the motivationsfor the repeal of the Glass-Steagall Act in the United States, a move that facilitated thecontinued international leadership of U.S. investment banking.

In summary, a brief international overview complicates the analysis, but at the sametime highlights the significance of studying investment banking and the securities indus-try from an economic geography perspective. Basic patterns do not conform to a simpledistinction between liberal and coordinated market economies along the lines advocatedby the varieties of capitalism school (P. Hall and Soskice 2001). The rise of the securitiesindustry has been common outside the United States; however, there are significantexceptions to this trend and diversity in terms of its spatial footprint. Ultimately, invest-ment bank capitalism is likely to be variegated, existing in different forms and varying inlevels of intensity at different scales of analysis, including the subnational level of citiesand regions (Peck and Theodore 2007, Dixon 2010).

The Global Financial Crisis and BeyondThe mortgage-lending boom (including its subprime segment) and the house-price

bubble of the late 1990s and 2000s were underpinned by relatively low interest ratesmaintained by the Federal Reserve and the U.S. government’s support for the expansionof house ownership engineered through the government-sponsored enterprises of FannieMae, Freddie Mac, and Ginni Mae (Ron Martin 2011). Investment banks (includinginvestment banking subsidiaries of bank holding companies) were nevertheless at thecenter of the production and distribution of securities based on mortgages, includingthose of subprime quality. They invented collateralized debt obligations (CDOs), theirmutations in the form of CDOs squared, and cubed, as well as credit default swaps (CDS).They were the main private institutions buying mortgage and other asset-backed securi-ties from loan originators and government-sponsored enterprises to convert them intoCDOs and using their global networks to sell these instruments to investors around theworld. In the process, they would pay rating agencies for evaluating CDOs to make these

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instruments investible by pension funds and other institutional investors. Tett (2009) alsoreported that they were often investment banks themselves that would organize courses onCDOs for rating agencies.

Apart from being major innovators of and conduits for the production and distributionof CDOs, investment banks accumulated large amounts of asset-backed securities, CDOs,and related assets in their portfolios. Partly doing so was unavoidable because they had tobuy pools of mortgages before they processed and sold them. In addition, investmentbanks would retain some CDOs in their own investment portfolios, as well as buy CDOsand CDSs from other institutions, attracted by relatively high rates of return. Thesepurchases were conducted with borrowed money, rather than with the banks’ own capital.Vehicles used by investment banks for the processing of asset-backed securities andinvestment in CDOs and CDS, referred to mostly as special investment and specialpurpose vehicles (SIVs and SPVs), were kept off the balance sheet as separate legalentities. To disguise them further, SIVs and SPVs were often registered in secrecyjurisdictions and tax havens, although the scope of this strategy is yet unknown (BaselCommittee on Banking Supervision 2009). In sum, investment banks were at the heart ofwhat came to be known as the shadow banking system (Pozsar, Adrian, Ashcraft, andBoesky 2010). The share of broker-dealers (investment banks outside bank holdingcompanies) themselves in the total financial assets of the private sector rose from less than2 percent in 1980 to 22 percent in 2007 (Pozsar et al. 2010).

In the afterword to the Ascent of Money, Ferguson (2009) suggested that the GFC hasled to the extinction of the U.S. investment banks, as Lehman Brothers went bankrupt,Bear Stearns and Merrill Lynch were taken over by commercial banks (JPMorgan andBank of America, respectively), and Goldman Sachs and Morgan Stanley convertedthemselves into bank holding companies. More likely, we may be witnessing adaptationand mutation rather than extinction. Although commercial banks take over some invest-ment banks, it does not necessarily imply less of an investment banking culture in finance.The past three decades have seen many commercial banks, including Citigroup, DeutscheBank, Royal Bank of Scotland, and Credit Suisse, permeated or even dominated byinvestment banking cultures, with traders and investment bankers becoming their execu-tives. Second, the bankruptcies of a few investment banks and securities firms may implylarger market shares for those left on the stage, whatever their legal format. In fact, in2009, Goldman Sachs, Morgan Stanley, Credit Suisse, and Deutsche Bank all enjoyed thehighest profit margins (net profits to revenues ratio) since the start of 2006 (see Figure 13),and Goldman Sachs recorded the highest absolute value of net profits in the period2006–9. The securities industry in NewYork City reportedly lost 30,000, or 16 percent, ofits jobs during the crisis, but in the second half of 2010, 3,600 new jobs were added, andthe overall compensation pool in 2010 was larger than in 2009 (Office of the New YorkState Comptroller 2011). This is clearly not a picture of an industry in retreat. It seems thatthe real threat to investment banking can come only with financial reregulation. As ofearly 2012 with financial reform packages still under debate on both sides of the Atlantic,it is too early to pass judgment on their impact on investment banking. Issues of particularrelevance to investment banking include the regulation of remuneration practices, restric-tions on proprietary trading, and the separation of investment banking from commercialbanking.

According to some, including Ferguson (2009), a major challenge for investment bankswill come from sovereign wealth funds (SWFs). To some extent, SWFs can be seen asinsurance policies of emerging economies against the vagaries of volatile global financialmarkets, demonstrated most acutely with the Asian financial crisis of 1997–98 (Clark andWójcik 2001). SWFs represent foreign currency reserves, with which these countries can

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defend themselves against sudden outflows of money without relying on the IMF (Clarket al. 2010). It is ironic that although while investment banks were among the institutionsfleeing from Asian markets in 1997–98, 10 years later, some SWFs came to their rescuewith vital injections of capital. In 2008, the Government of Singapore InvestmentCorporation invested in Citigroup and UBS, Abu Dhabi Investment Authority and KuwaitInvestment Authority also invested in Citigroup, Korea Investment Corporation andTemasek Holdings invested in Merill Lynch, China Investment Corporation invested inMorgan Stanley, and Qatar InvestmentAuthority invested in Credit Suisse. Commentatorswho thought that SWFs were thus capturing a unique opportunity to swallow leadinginvestment banks were soon proved wrong. In 2009, SWFs lost a lot of money on theseinvestments and sold them off quickly. As of the end of 2010, the only major stakes ofSWFs in U.S. or European investment banks (or banks with major investment bankingoperations) were those by China Investment Corporation in Morgan Stanley (12.6 percentof the share capital) and Qatar Investment Authority in Credit Suisse (5.3 percent).

Recall the structure of the securities industry. SWFs are government-controlled invest-ment funds and, as such, operate on the buy side of the global securities industry. Theirassets, although close to $4 trillion in 2010, still represented only 5 percent of conven-tional assets under management globally, only a seventh of the pension fund assets(TheCityUK 2010). Investment banks flourished during the rise of pension funds in theUnited States and Europe in the past 30 years, and so the size of SWFs itself representsas much an opportunity as a challenge to investment banking. SWFs, however, tend topursue active and strategic, rather than passive, investments (typical of pension andmutual funds), including the acquisition of controlling stakes in the military, aerospace,and automobile sectors in which their home countries lack know-how (Haberly 2011).This may be a deliberate strategy of bypassing long intermediation and securitizationchains that is compatible with passive investment strategies, in which investment banksare the primary movers and shakers. In the post-GFC world, investment bankers are keenon obtaining deals from SWFs. They are likely to lobby for SWFs to become like pension

Figure 13. Net profit margin of leading banks. Source:Author, based on data from Factiva DowJones.

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funds—rather passive containers of funds, depending on the expertise of investmentbanking and the rest of the securities industry. It is not surprising that Norway’s Govern-ment Pension Fund, pursuing a passive investment strategy (with a large part of the fundsmanaged by the City and Wall Street) is considered in the United States and Europe as amodel of transparency and governance (Clark and Monk 2010). SWFs are the main newplayers in the global securities industry, and their relationship with investment banks isone of the pivots of the emerging global financial landscape.

Conclusions and ImplicationsThis article has focused on the role of investment banking in the U.S. economy of the

past 30 years, including the recent GFC. This is a controversial topic, with the mediadrumming up the culpability of investment banking with stories on exorbitant bonusesand cases of dubious business practices and influential scholarly accounts shiftingattention to the failure of the government and global imbalances. To provide an economicgeographic perspective on the debate, I combined the analysis of basic patterns ofemployment in the financial sector, with the analysis of the position of investment bankingwithin the financial sector, its rise to power over the past 30 years, and its involvement inthe GFC. I demonstrated that investment banking plays a central part in the securitiesindustry, which has been by far the most expansive segment of the U.S. financial sector.In fact, while overall employment in the financial sector was stable, both employment andpayroll in the securities industry skyrocketed. The development of the U.S. financialsector in the past 30 years could be summarized in one word—securitization. The processof securitization has been commanded from Manhattan (with Wall Street), which could bereferred to as a securities industry rather than a financial center. The analysis alsoindicated that the securities industry has been a major contributor to growing incomeinequality between the financial and nonfinancial sectors, between Manhattan and the restof the country, and within Manhattan.

Investment banking, functioning both independently from and within commercialbanking, is the core and the elite of the securities industry. Investment banks permeate allaspects of the securities industry and represent the best-rewarded professional groupwithin it. Beyond purchasing power, their influence extends to politics and ideas guidingbusiness practices in the corporate sector. The power of investment banking has risen overthe past 30 years under the conditions of the growing demand for investment services,technological changes, deregulation, and globalization. Investment banking, and thesecurities industry in general, has taken advantage of and adapted to these changes,making it one of the most successful sectors of the U.S. economy. The GFC, however,revealed a long shadow of this success. Investment bankers invented many of the financialinstruments that were used to intensify the turnover in the securitization chain andwere at the heart of the shadow banking system, often using methods to disguiseits operation. Their reputation helped legitimate the chain and the system in the eyes ofinvestors.

The findings of this article speak against the often-told story on the causes of the GFC,which starts with the assumption that over the past few decades, finance has becomedisintermediated, with banks becoming less and markets more important. In 2008, theUnited States had more people working in financial intermediation than ever before, theirshare of total employment was as high as in 1978, and their share of the total payroll wasnearly twice larger. This situation was due mainly to the securities industry, in the core ofthe financial sector, which has blossomed in terms of overall size, the size of leading firms,remuneration, and power.

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Economic geography can contribute to demystifying finance and to explaining the GFCby studying the securities industry and investment banking at its core. This articlepresented an exploratory study, which could be continued along several lines of inquiry.Using data on profits made in investment banking and the securities industry, in additionto data on employment and remuneration, one could question the level not only ofdisintermediation but of competition in the sector. An international analysis of changes inemployment could be used to interrogate the mobility of investment banks and bankersthat is often invoked by industry insiders to improve their bargaining power versusgovernments. Further analysis of the position of investment banking within the valuechains and power structures of finance could help interrogate claims of the power ofinstitutional investors and fiduciary capitalism. The investigation of investment bankingcan also offer a unique perspective on the trajectory of commodities markets and carbonmarkets (Knox-Hayes 2009), in which they are key players. This is not to mention the roleof investment banking and the securities industry (including SWFs) in shaping the map ofglobal financial centers, including the debated shift to Asia.

To be sure, the study of investment banking is also central to a cultural economicapproach in geography. People who started their careers in the securities industry in the1980s and early 1990s were the elite of a wave of yuppies who were employed in boomingproducer services. In the late 1990s, bourgeois bohemians (bobos), the elite of the creativeindustries, stole the limelight and attracted a lot of attention in the social sciences. Eliteyuppies retreated into the shadows. But while bobos ran the facade of capitalism of thelate 1990s and 2000s, elite yuppies at the peak of their careers in the securities industrywere happily running the engine room, building a shadow financial system and makingfortunes on it. At the extreme, one could argue that the creative class and industry havebeen a sideshow of financialization and securitization. Nine years ago, Wrigley, Currah,and Wood (2003) called for more research on investment banking as one of the keys tounderstanding the dynamics of capitalism. This call is now more urgent than ever.

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