Credit Crisis Affects Fall Hires

Welcome to In the Black, a weekly blog focusing on current financial news and how it relates to job seekers and job holders in various financial services industries.

This week, the global credit crisis that began in July is still topping headlines and continues to create significant ramifications across several financial sectors.  (For those of you who've been out of town and away from a newspaper this summer, the increase in foreclosures in the U.S. caused by a steep decline in property values reached a boiling point in July, drying up credit markets and reaping havoc across the financial services industry.)

Also this week, investment banks began their annual recruiting efforts at campuses nationwide.  Though it remains to be seen to what extent the credit crisis will affect hiring, word from recruiters is it's "highly likely" to "almost inevitable" that the largest firms will be extending fewer offers to undergrads and MBA students this fall.  They also say that some firms will be bypassing certain schools during their fall recruiting rounds.  Units such as leveraged finance and structured finance that depend on credit markets will certainly be impacted, and it's probable that corporate finance and M&A departments will also go lighter on the hiring.  As one recruiter puts it, "It's easier not to hire new people than fire old ones."

Still, there's been a lot of firing.  The foremost fallouts have affected subprime mortgage lenders themselves—firms offering home loans at above-market interest rates to borrowers with shaky credit.  Many of these firms went out of business, filed for bankruptcy or severely slashed headcount.  For example, Lehman Brothers recently announced its mortgage lending business BNC Financial would be shutting down, leaving 1,200 employees without a job.  And this past Tuesday, mortgage lender Novastar raised the estimated percentage of its staff who'll be receiving pink slips from 37 percent to 69 percent, meaning nearly 1,000 Novastar employees will soon be out of work.

Other firms that operate in the credit markets were affected as well.  Hedge funds with large positions in mortgage-backed securities such as two Bear Stearns-owned funds and one UBS-owned fund have closed shop.  In the past two days, Royal Bank of Scotland announced it would be scaling back its U.S. structured finance business and Deutsche Banks announced the demise of its proprietary credit trading desk.

In addition, merger and acquisition deals, some of the most lucrative transactions for investment banks, have nearly come to a stand still, as lenders all but stopped putting up money to finance deals.  An indication of just how much investment banks will be affected by the credit crisis, Standard & Poor's estimated earlier this week that profits at the five biggest investment banks in the U.S. could decrease as much as 70 percent in the second half of the year versus the first half.

The good news for career seekers is smaller banks will likely not be impacted as much as larger ones, any changes in hiring will vary from firm to firm, and some banks might hire the same number of new employees but in different departments.  For example, given the slow M&A market and the many corporations struggling and filing for bankruptcy, restructuring could be a hot place to be come next summer.

And for those of you who will be interviewing for banking jobs soon (first rounds begin at the end of the month for undergrads and in early October for MBA students), keep the credit crisis in mind—there's probably not a better question to ask your interviewers than how the crisis will affect their firms.