Markets

UBS-Jeffries Case Reveals That Without Bonuses, Investment Banking Doesn't Work

By Daniel Harrison

Updated on: June 26, 2009 / 2:04 PM EDT / MoneyWatch

What do you do when your bank is hemorrhaging money at such a speedy rate that you are forced to slash bonuses, driving key employees into the arms of other firms?

UBS has come up with a desperate answer to the dilemma: slap the offending rivals with a lawsuit.

UBS claims that boutique investment bank Jeffries Group snatched almost its entire health-care investment banking team in a "massive, premeditated raid," according to Bloomberg. Specifically, the Swiss bank lost the head of its health-care investment banking unit Benjamin Lorello, who seems to have brought 36 employees over from his former division.

The poaching is the second to have taken place between the two firms this year: earlier in the month, Jeffries snatched five quantitative traders in a deal driven by compensation concerns. And in an ironic twist to the latest story, Lorello once called Jeffries a "low quality firm with no track record," according to financial blog Clusterstock.

While UBS's lawsuit may turn out to bear strong legal merits, the bank can hardly blame its woes on anyone but itself. Earlier in the year, UBS slashed bonuses for its key employees by up to 80 percent.

Since the beginning of the credit unwinding last year, pundits and politicians alike have been largely unsympathetic of bankers who bemoan lost income from reduced bonus payments. Many even hope for a return to the days of steady, long-term focused compensation packages. But, as this case illustrates, that is just wishful thinking.

As former Goldman Sachs banker-turned-bestselling-author Tetsuya Ishikawa noted recently in a television interview, "the supply of the top bankers is not endless. If one banker is going to bring in 50 to 100 million dollars of revenue, then if a bank can't pay him [what he wants], he'll just walk out and go somewhere else." The debate, and in particular the arguments put forward by Ishikawa, are well worth watching in full:

Indeed, as regular readers will be aware, I have made this very point here at BNET Finance many times. The point has not usually been taken with much agreement. As much as it might not suit the opinions of the general public, UBS's dire straights right now reveal a crucial point about the operations of the industry: without bonuses, investment banking doesn't work.