Crisis Altering Wall Street as Big Banks Lose Top Talent

The turning point for Stephan Jung came in February, around the time bonus checks were slashed. A veteran of UBS, one of many banks tarnished by the financial crisis, Mr. Jung realized that the old Wall Street would not be bouncing back any time soon. It was time to head for the new.

Jaap Steinvoorte Wall Street

After 10 years, I did not see a future for myself,” said Mr. Jung, 42, who quit to parlay his sales expertise into a career at Aladdin Capital, a small but rising investment firm run by others who had also left some of the most venerable names in finance.

There is an air of exodus on Wall Street — and not just among those being fired. As Washington cracks down on compensation and tightens regulation of banks, a brain drain is occurring at some of the biggest ones. They are some of the same banks blamed for setting off the worst downturn since the Depression.

Top bankers have been leaving Goldman Sachs , Morgan Stanley, Citigroup and others in rising numbers to join banks that do not face tighter regulation, including foreign banks, or start-up companies eager to build themselves into tomorrow’s financial powerhouses. Others are leaving because of culture clashes at merging companies, like Bank of America and Merrill Lynch, and still others are simply retiring early.

This is certainly a concern for the banks losing top talent. But other financial experts believe it is the beginning of a broader and necessary reshaping of Wall Street, too long dominated by a handful of major players that helped to fuel the financial crisis. The country may be better off if the banking industry is less concentrated, they say.

“If the risk-taking spreads out to these smaller institutions, it is no longer a systemic threat,” said Matthew Richardson, professor of finance at the Stern School of Business at New York University. “And innovation is spreading out too. This is a good thing.”

In past downturns, the big firms suffered but bounced back when the economy returned to health. This time, their pain may be more lasting given the depth of the crisis and the government’s efforts to rein in Wall Street’s practices as it tries to turn around the economy, a process that may take years.

To deter the people it thinks caused the crisis, the government is clamping down.

Sensing a shifting tide, talented bankers who fear a dimmer future at banks that have taken taxpayer money are migrating to brash boutique firms like Aladdin, which are intent on proving their critics wrong by chasing fast profits and growth in hopes of one day rising up as challengers to the old guard.

The New York Times canvassed more than a dozen new boutiques and found that several hundred bankers had been snapped up since the summer of 2007 after layoffs or being lured by smaller firms like Broadpoint, Pinetum Capital and BTIG — and bringing their accounts, trading flow and profits with them.

“We have the opportunity to step into the shoes of a Bear Stearns or a Lehman,” said Lee Fensterstock, the chief executive of Broadpoint, a Manhattan firm that has hired more than 240 people since fall 2007, when the financial crisis started taking root. “We would never have been able to do this five years ago, but now, it’s as if all of Wall Street got turned upside down, and they shook out all these people.”

Michael O’Hare, who used to run North American equity cash trading and sales at JPMorgan Chase, is building a new sales and trading operation at LaBranche Financial Services, an established firm that is starting a line of business that was traditionally done only within investment banks. “We are attracting people from Merrill, from JPMorgan, from Bear,” he said. “I’m not talking the second tier. We have the cream of the crop.”

One of the most prominent new banks, Moelis & Company, an advisory boutique that has offices in New York, Los Angeles and London, among other centers, was founded in 2007 by Ken Moelis, the former president of investment banking at UBS. Mr. Moelis has hired 100 bankers, including 17 from UBS, 9 from Bear Stearns , 3 from Morgan Stanley  and 3 from Goldman Sachs.

These kinds of start-ups emerged in earlier cycles, and many remained small and inconspicuous. But some evolved into scrappy rivals. In 2006, senior bankers from Goldman and Morgan Stanley formed Perella Weinberg, a top boutique. Roger C. Altman, a former Lehman banker, created Evercore, another top performer, a decade earlier.

Today’s upstarts aim to do the same by hiring away the industry’s talent and, in some cases, trying to replicate the entire investment banking model that was largely dismantled after Lehman Brothers fell last fall.

Still others are moving to foreign competitors. According to the banks and executive recruiters, hundreds of bankers have been jumping to Deutsche Bank and Credit Suisse, neither of which took a government bailout.

They see a rare chance to upgrade talent and standing on Wall Street — and globally — by luring top minds who would not have considered moving from a Goldman Sachs or a Morgan Stanley in flush times. Now that their rivals must accept compensation limits and other restrictions that come with the use of taxpayer support, the foreign banks are finding more eager takers.

Over all, head counts at the 12 biggest global investment banks were cut, on average, by about a fifth in 2008, according to data compiled by Oliver Wyman, a consultancy.

Financial services companies have announced more than 400,000 layoffs in the United States in the last two years, including 148,000 in the final quarter of 2008 alone, when the financial crisis hit a zenith, said Mark Zandi, chief economist at Moody’s Economy.com.

For the chiefs of Citigroup, JPMorgan Chase and other United States banks that have received government money, the implications are worrisome, even though plenty of their workers have stayed put for now.

Vikram S. Pandit of Citigroup and Jamie Dimon of JPMorgan, for example, say it will be harder to break away from taxpayer support if the workers most capable of steering their banks toward recovery walk away.

Of course, their new competitors have greater flexibility to attract talent with creative pay structures. With the public outcry over bonuses, some boutique firms are instead dangling hefty commission packages.

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Banks paid out some $18 billion in bonuses last year, down 44 percent compared with a year earlier, and many workers viewed them as paltry payouts. Some lawmakers and members of the public expressed outrage that billions in bonuses were paid at all, and suggested that most traders and bankers were unlikely to find better jobs elsewhere, any time soon, making retention bonuses unnecessary.

Brian McGough, 36, considered himself a rebel when he left Morgan Stanley in early 2008 to help start an independent research shop, Research Edge, in New Haven, Conn. Morgan had just reported a devastating mortgage write-down, but Mr. McGough’s friends and mentors were trying to persuade him to stay, he said.

All that has changed. “I can’t tell you how many of my former colleagues whose names used to be up in the lights are calling me asking me for jobs,” he said.

This story originally appeared in the The New York Times