Young Bankers Who Got Used to Smooth Sailing Prepare for a Storm

(Bloomberg Businessweek) -- Life on Wall Street has been so smooth for Drew Pettit’s generation that the 33-year-old Citigroup Inc. strategist decided to study financial pain. He started reading “the most bearish, miserable set of books I could potentially find.” He and colleagues whose careers began after the 2008 financial crisis benefited from a stretch when money was what Pettit calls “cheap, easy, fast.” Even when the pandemic sent markets reeling three years ago, Wall Street quickly rebounded, fueled by government help. Pettit says he and his younger colleagues “don’t have a sense for what a bad business environment looks like.”

They’re about to find out. Young bankers are bracing for the first sustained sourness of their careers, with strategists forecasting a recession, if not one of the worst years for the world economy in four decades. The era of free money is gone, with interest rates marching upward to 5% and beyond, thanks to the Federal Reserve’s dogged campaign against inflation. After a run of trillion-dollar profits for the biggest banks over the last decade, the new conditions could deliver countless layoffs, slumping deals, choppier markets and grim expectations. “It’s absolutely the first time many of us are seeing a corrective environment like this,” says Jeff Bjorkman, a vice president in Lazard’s capital markets business who started there in 2016. While he and his cohort experienced the pandemic volatility of early 2020, “this shift feels much more durable and likely prolonged.”

A couple of apprehensive chief executive officers have even raised the subject with Michael Hsu, who as acting comptroller of the currency is one of the top US banking regulators. “Bankers themselves are saying ‘Hey, I’ve got a bunch of young people who’ve never been through X, Y or Z, and we need to teach them,’ ” Hsu says. “There are some muscles that haven’t been exercised in a while.” He says he’s heard of bank bosses waging internal campaigns “to just go around and talk to folks and say, ‘Hey, guys, remember this?’ ”

When Blair Effron, co-founder of New York-based investment bank Centerview Partners, looks at his junior colleagues, he realizes they haven’t “been through a bunch of downturns.” He wants them to have the skills to understand balance sheets and capital structures in complicated circumstances: “What does it mean if you need different financial instruments to get a deal done because one can’t just go to a bank and borrow six times?”

Alison Harding-Jones, a top Citigroup banker in London, has suggested the coming lessons could be rough on colleagues who started around 2010 and are on their way to becoming managing directors. “So they’ve never really seen an environment where money hasn’t essentially been free or very, very cheap,” she told a conference late last year. “We’ve seen this pandemic, which has inflated this bubble, which has driven this incredible amount of activity, and they’ve kind of thought, ‘Well, that’s normal.’ ”

A decade of easy money has made risk-taking so prevalent that it will take time to unlearn the lessons of this era, says Al Rabil, CEO of private equity firm Kayne Anderson. He says Fed policy before and after the pandemic was to hand out free money. “Unfortunately, that promotes reckless behavior,” says Rabil.

Few bankers expect catastrophe. Lenders spent a decade shoring themselves up, thanks to post-financial-crisis rules designed to avoid another blowup and a succession of stress tests to ensure banks can weather shocks.

Of course, the cocktail of inflation and rising rates hits Wall Street in different ways. It spells bad news for mortgages and Wall Street’s housing business, where some banks have already begun eliminating jobs and curbing lending. A dragging economy can slow down mergers and leveraged buyouts, choking a key profit engine. The threat of a recession cuts into earnings by forcing banks to set aside billions of dollars in reserves to cover loans going bad. Yet higher interest rates also help widen the gap between what banks earn on loans and what they pay depositors, or what Wall Street calls net interest margin. And the volatility that typically comes with economic uncertainty can be a boon for trading floors.

While they may not have experienced prolonged downturns, the under-35 set has been through career whiplash. The pandemic boom led to burnout, followed by new expectations for better work-life balance, which quickly turned into anxiety about negative consequences for taking nights off. That’s now been supplanted by worries about layoffs. Goldman Sachs, Morgan Stanley, Credit Suisse and Barclays either have announced plans to fire people or have already done so. When Goldman boss David Solomon warns of “some bumpy times ahead,” it can send shivers beyond his offices.

Some of the young bankers aren’t sure what kind of bumpiness they’ll encounter. A structured credit trader for a Wall Street giant, who’s around 30 and asked for anonymity to speak freely, says he’s been worrying about the social and geopolitical fabric changing in ways he’s never seen and will reshape his work. He finds himself thinking about it all day.

Annie Hardy, a senior vice president in the infrastructure and public finance division at Siebert Williams Shank & Co., isn’t worried. “In the past, when it’s just been low interest rates and this wonderful market environment, everything is a little bit easier,” says Hardy, 35, who helps agencies such as state transportation departments borrow money. “But sometimes when it’s a little bit more difficult it builds some character and brings you closer with your clients.”

Maria Imbett, a 31-year-old who works as director of institutional sales and trading at StoneX Group, a New York-based financial-services company, says she’s had senior traders tell her, “You haven’t worked through this kind of volatility, you’ve never seen rates this high.” But, she says, she’s been through enough—a global pandemic, inflation, the war in Ukraine—that she’ll be telling newcomers about it in a decade. “Markets change, there’s a lot of volatility,” she says. “But the sun will rise again.”

Even Pettit has a measure of calm after reading his dour tomes. “We have people on the team that have seen everything and have lived through all of these markets, and then we have people on the other side that have grown up in the world of big data and new methods,” he says. “We can put both those two worlds together.”

More stories like this are available on bloomberg.com

©2023 Bloomberg L.P.