Business

Saturday October 20, 2012

Cutting jobs not always the answer

PLAIN SPEAKING
By YAP LENG KUEN


IN the wake of falling revenues, global investment house Morgan Stanley has launched cuts in jobs, acknowledging that bankers on Wall Street are overpaid.

Painful realities are setting in; when the going was good, fat bonuses were awarded as incentives. They are now regarded as a major drag on profitability.

In view of investors' concerns, these cuts also serve to appease those on a witch hunt for excuses to chop spending.

Cost cutting is unavoidable in many circumstances but very often, the top management still end up with handsome pay packets while those on the lower rung suffer; many lose their jobs for reasons beyond their control.

If cutting jobs and bonuses is just to appease investors and an indignant public, banks should think twice of the long-term effect of such an action.

Having taken time to build a good talent pool, it may not be a wise step to cut off well-trained staff. There may be other ways of cost cutting apart from shedding staff and constraining their bonuses which may have been well-earned.

Fundamentally, revenues should be driven by various sources of income; cutting jobs should be a last resort.

There has been an earlier round of job cutting on Wall Street following the 2008 financial crisis. Could this be the start of another round?

In Europe, the International Monetary Fund has voiced its concern over high unemployment that could escalate if eurozone countries keep dragging their feet on financial decisions.

Underscoring all these negative developments is the rise of Asian investment banks and their need for talent. It is indeed ironical that when Western banks are shedding jobs, Asian banks stand ready to absorb some of the good talent as they spread their wings in the region .

At this juncture, it is important for Asian banks to remind themselves not to work up to a potential bubble which can burst and also lead to job cuts.

It is true that what goes up must come down. But Asian banks already have the benefit of lessons learnt from the Western banks and therefore, should avoid a similar crippling situation.

With the global spotlight on investment banks, performance will be key to survival. Performance should be gauged by several indicators such as profitability, ethics, focus on customer service, enhancing of shareholder value, discipline in trading and risk management.

No longer are certain stockmarkets dubbed “casino operations''; investment banking in the West of late has earned this reputation.

Due to large risks taken on unsustained bets, investment banks in the West have come under the hammer following the collapse of some big names. The Libor interest rate rigging scandal has continued to keep them under fire.

It is not just retail banks that have to work hard to regain customers' trust; investment banks also for their unbridled risk taking and in some cases, so dubbed “unethical” practices.

Besides the Libor scandal, the London Whale incident exposes the large risks that were taken and could not be sustained.

In reference to the JP Morgan trader who took large bets on corporate credit default swaps, the London Whale's trades had incurred heavy losses for the company.

Among the latest messages is for banks to start building a structure to ensure self-sufficiency, should another financial crisis arise.

Bank of England deputy governor Paul Tucker has warned that in future, there would be no more bailouts and banks would have to work their way out by themselves.

According to The Telegraph, 'bailing out the banks is still costing the taxpayer £2.4bil in cash a year as the state continued to prop up the banks with £228bil of loans and guarantees. At the peak of the crisis in 2009, the taxpayer was on the hook for £1.16 trillion.''

Overall, performance, structure and contingency will be important features in all banks, not just investment banks.

Associate editor Yap Leng Kuen sees more pressure piled on banks that have not been very disciplined.

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