Merrill exec warns of Iraq war impact on banks
By Thomas Atkins, European Banking Correspondent
DAVOS, Switzerland, Jan 27 (Reuters) - The top European investment banker for Merrill Lynch <MER.N> on Monday said a long war in Iraq would be devastating for the sector, which could face further job losses if business does not pick up.
Cuts that have seen 50 percent of staff disappear at some investment banks could slice deeper if fears of a prolonged equity market paralysis come to pass, Claudio Aguirre, chairman of European investment banking at Merrill, told Reuters.
Equity trading operations have been some of the hardest hit, forcing Merrill and other banks to slash or close trading operations in European financial capitals outside of London, he said.
"We feel that we now have the right size for the business," Aguirre told Reuters at the World Economic Forum in the Swiss ski resort Davos.
"But if this paralysis continues, we may have to cut more. It depends on the war," he said.
Aguirre said fears of a war in Iraq had paralysed large portions of the European economy that affect his industry as companies delay financing decisions and capital expenditures. "In terms of our industry, the war is going to make it worse, if that were possible," he said, echoing a theme heard often at this year's Davos summit, where soul-searching among global business leaders has supplanted the jubilation of years past.
"I've been in banking for 25 years and I've never seen anything like this," Aguirre said. "If it (the war) lasts a long time, it could be devastating for our sector."
Peter Weinberg, the head of Goldman Sachs' <GS.N> European operations, told Reuters in Davos last week the current downturn for investment banks was unlike any seen before.
Capacity among some rivals will dry up as banks downsize or consolidate, Aguirre said.
"The industry is not going to disappear but we are going to see the disappearance of a lot of competition," he said. "We will see a lot of banks consolidating to cut costs."
Merrill, for its part, has the size to remain profitable in many divisions, Aguirre said. "It's very clear that we want to remain independent," he said.
Merrill has cut a third of its total staff from peak levels seen at the end of 2000.
PULLING THE PLUG
Aguirre said big investment banks had already gone a long way to pull equity trading operations out of Europe's continental financial capitals like Madrid or Frankfurt and consolidate them in London.
Banks now aim to focus equity trading on the top 10 or so stocks that comprise 80 percent of exchange volumes, he said.
Only the top three banks will be able to make money on equity trading in this environment. For the others the volumes are simply too thin, he said.
"So far we are not pulling out of any market. We are downsizing," he said.
But in fixed income and foreign exchange operations, Merrill Lynch has expanded in recent months, adding 70 staff in forex trading alone, he said.
With such a gloomy business outlook, investment banking staff in Europe may not be able to look forward to a rise in bonus payments in 2003, even after the tough cuts in bonuses in 2002, he said.
"It's too soon to tell whether they (bonuses) will be flat or not. Flat may be very optimistic," Aguirre said.