Investment bankers, whose institutions have already been bailed out to the tune of $817 billion across the globe, now have something else to thank taxpayers for: deals.
In a year when some of the biggest transactions came from emerging markets, governments from Washington to Beijing helped buoy investment banking fees by selling off stakes in financial companies, automakers and other corporations.
Bankers eagerly signed up to handle those offerings, even though they sometimes paid fees of less than 1%, compared with a historical average of 3% to 5%, Bloomberg Markets magazine reports in its April issue.
The government-backed deals helped to push fee revenue up last year by 5.8% across the industry, to $49.1 billion from $46.4 billion, as total deal volume stayed constant at about $7 trillion, according to data compiled by Bloomberg Markets for its seventh annual ranking of the best-paid investment banks.
The volume of announced mergers and acquisitions rose 27%, to $2.2 trillion, while fees rose 23%, to $17.9 billion.
Deal totals in the bond markets fell to $4.1 trillion from $4.7 trillion, and fees also slipped.
Fees for all initial public offerings and secondary stock offerings dropped to their lowest level since Bloomberg began compiling such data in 1999, averaging 2.9%. The industry average in 2003 was 5.6%.
Although bankers say global markets are on the mend, it will take years before they see anything close to the record $86.9 billion in investment banking fees earned in 2007, said Hugh "Skip" McGee, head of global investment banking at Barclays Capital in New York.
"You're going to be hard-pressed to get back to '07 levels anytime soon," he said.
The world's best-paid investment bank in 2010 was JPMorgan Chase & Co., which ranked No. 1 in the Bloomberg 20 for the third year in a row, with total fees of $4.14 billion. It also led the field in fees from bond and equity issues.
Morgan Stanley supplanted Goldman Sachs Group Inc. for the No. 2 position in total fees for 2010, earning $3.67 billion.
Goldman Sachs was No. 3 overall with $3.60 billion. It ranked No. 1 in earnings from M&A, as it has every year since the Bloomberg 20 started in 2004.
James "Jes" Staley, the chief executive of JPMorgan Chase's investment bank, told investors and analysts at a Feb. 15 meeting at the bank's headquarters that Asia was a "critically important" region for the investment bank in 2010.
"Three of the five largest markets last year in terms of IPOs were Hong Kong at $57 billion, Shenzhen at $47 billion and Shanghai at $27 billion," Staley said. He said that while his unit gets 18% of its revenue from emerging markets, the growth in revenue from that sector is one and a half times that of the investment bank as a whole.
Outside Asia, the U.S. Treasury Department was one of the most important customers for Wall Street last year, selling stock it acquired during the 2008 to 2009 financial meltdown in a long list of companies, including American International Group Inc., Ally Financial Inc. and Citigroup Inc. The Treasury negotiated rock-bottom prices, paying bankers, including Morgan Stanley, JPMorgan Chase and Bank of America Merrill Lynch, 0.75% to sell about half of its stake in General Motors Co.
Morgan Stanley picked up only 0.4% in fees as the sole underwriter for the $10.5 billion in Citigroup stock the Treasury sold. Petroleo Brasileiro SA of Brazil paid underwriters 0.65% to execute $23.5 billion of its $70 billion secondary stock offering, the biggest in history. Agricultural Bank of China Ltd., which launched the biggest IPO ever, paid its underwriters 1.96% for the $12 billion that was raised in Hong Kong.
JPMorgan Chase was an underwriter of the Agricultural Bank offering. At the meeting with investors, Staley said the investment bank expanded its work force last year by 42% in China, 40% in Brazil and nearly 20% in Russia.
Bankers are less optimistic about fast growth in Europe and the U.S., where new strictures by the Federal Reserve and the European Central Bank on the amount banks must hold in reserve against bad loans, and the amount of leverage they can take on, mean the high-flying days of 2005 to 2007 are over.
"The 2007 levels will be really difficult to get back to because of the new capital requirements and the deleveraging of financial institution balance sheets across the board," McGee said.
Asian corporations kept their bankers busier than in any other region. Asia provided seven of the 10 biggest IPOs in 2010, including the $22.1 billion dual offering in Shanghai and Hong Kong by Agricultural Bank.
While the U.S. and Europe lagged in the sale of new stock and bonds, the younger, emerging economies bubbled with new money and deals.
"All those countries that we thought of as the emerging markets are very developed right now," said Purna Saggurti, co-head of global investment banking at B of A. "China is the second-largest investment banking fee market already. You can't call it an emerging market anymore; it is the developed world."
M&A and share offerings were the daily bread of bankers last year in Brazil, Russia, India and China.
About 25% of the banking industry's M&A volume and some of the largest IPOs came from cross-border deals in Asia such as AIG's $20.5 billion spinoff of its Asian arm, AIA Group, which was the second-largest IPO last year.
A host of big Western banks had a hand in that deal, including Barclays PLC, Citigroup Global Markets Asia, Deutsche Bank AG, Goldman Sachs, JPMorgan Securities Asia, Morgan Stanley Asia, B of A's Merrill Lynch Far East subsidiary and UBS AG.
"Firms are once again thinking global after the retrenchment of the last couple of years," Barclays' McGee said. "They are looking to resume their growth trajectory."
In the U.S., the Treasury kept investment banks busy last year. Deutsche Bank alone advised the agency on 13 separate transactions that sold $3.9 billion in warrants for taxpayers in 2010.
Paul Taubman, co-president of institutional securities at Morgan Stanley, said the most important transaction of 2010 came very late in the year: The November IPO of GM, which filed for bankruptcy on June 1, 2009. On Nov. 17, it launched an IPO in which it sold $18.1 billion of common shares at $33 each, making it the second-largest U.S. IPO on record. GM stock, after rising as high as $39, was at $32.63 in midafternoon trading Tuesday.
"The General Motors deal was important for the economy; it was important for the markets," Taubman said. "It was a defining moment last year in many respects. It was increased in size; it was increased in price; it traded well in the aftermarket."
That deal marked the culmination of a banner year for Morgan Stanley's investment bank. Profits from continuing operations in the unit, including trading, more than doubled to $3.75 billion last year from $1.39 billion in 2009. The company generated higher investment banking revenue in the fourth quarter than Goldman Sachs.
Morgan Stanley, which in June 2009 repaid the $10 billion it borrowed through the Troubled Asset Relief Program, was a lead underwriter on three of the four largest IPOs last year: GM, Agricultural Bank and AIA Group.
Taubman credits Morgan Stanley's rise in investment banking to its high-profile hiring over the last half of the 2000s, beginning with the bank's global head of M&A, Robert Kindler, who Taubman lured away from JPMorgan Chase in 2006.
Kindler was a mergers lawyer for the New York law firm Cravath Swaine & Moore LLP before becoming a banker in 2000. Morgan Stanley also hired Gary Shedlin from Citigroup, who Taubman said brought with him a long roster of clients, and Dan Toscano, hired last year from HSBC to run Morgan Stanley's leveraged finance business.
"We've been able over the past few years to systematically attract, recruit and integrate some of the best bankers on the Street," Taubman said.
The rise in announced M&A deals in 2010 bodes well for investment banking generally in 2011, Taubman said.
"If there's more M&A activity, that drives all the volumes around it," he said. More M&A activity means more so-called bridge financing to help companies complete their acquisitions, Taubman said, which can in turn be followed by bond and equity deals for the merged company.
In the U.S., bankers say, corporations are ready to put the $1 trillion in capital they've been hoarding over the past two years to work.
"We came into 2011 with a lot of momentum," said Jacques Brand, co-head of investment banking at Deutsche Bank in New York. "The market broadly is coming off of a very strong high-yield issuance, very strong equity market in the fourth quarter and increasing momentum in M&A activity. Corporations feel optimistic about their ability to consummate transactions, so I think we're going to see an uptick in M&A activity."
One good sign for the bankers: Private-equity firms are doing deals again.
Firms such as Blackstone Group Inc., Carlyle Group and KKR & Co. represented 25% of investment banking fees during the height of the leveraged-buyout boom in 2006 and 2007, according to Deutsche Bank. That dropped to about 5% of the market in 2008 and 2009.
Last year, private equity accounted for about 16% of the industry's fees, Brand said, and he expects the number to exceed 20% this year.
Deutsche Bank advised IMS Health Inc., a Norwalk, Conn., health care company, in its $5.2 billion sale to TPG Capital, which was announced in 2009 and completed in February 2010. It was the largest leveraged buyout since the collapse of Lehman Brothers and the fifth largest ever.
"We saw sharp, renewed LBO and IPO activity in 2010, and we expect that to continue in 2011," Brand said.
Investment bankers are confident that M&A and stock and bond issuance will all rise substantially this year, especially if Europe stabilizes.
