Weinberg: M&A will be slow. The markets will be slow. So we are sticking to our knitting, focusing on our clients, and investing in growth areas such as structured finance and credit derivatives.Q: Do you still consider Europe a growth market?
Weinberg: Europe is definitely a growth market, but it is in hibernation.Ward: We were thinking in March, 2000, that the growth rate of the industry would be double that of the U.S. Now it has declined faster than the U.S. For instance, the Neuer Markt went up four times as fast as the Nasdaq but now is only worth 13% of its peak. It could take the Neuer Markt five years to make it back.Q: Are the forces that drove the investment-banking boom in Europe still in place?
Weinberg: The forces that created the flurry of activity in 1999 and 2000 are still there--pension reform, the euro, the migration of bank debt to bond debt, and the move to equities. But the crisis of confidence among governments, CEOs, and investors has muted the effect of these forces for now.Q: How has raising capital through equities changed?
Ward: Two years ago, you would have had a two-week roadshow. Now you have accelerated book-buildings [short-notice transactions in which a bank prices and sells huge blocks of new stock for a company in one day]. There is growing pressure for banks to put their capital at risk [by guaranteeing a floor price for the stock.] Sellers are increasingly concerned about taking any price risk. That tells you something about the sentiment of CEOs and the pressures on them. The days of endless shrimp cocktails over presentations are gone. Another difference is that you have to factor in the weight of hedge-fund money. If you don't have an in-depth understanding of the hedge-fund community, your risk increases dramatically. The good news is that the universe of banks that would backstop these deals is substantially smaller.Q: After all the cost-cutting in the past year, is there still overcapacity in investment banking?
Weinberg: Sure, particularly at firms that have undergone large, strategic mergers.Ward: There is an element of short-term thinking in all this. We believe we are very well positioned for an upturn. The risk is that you make cuts that are too deep. We can't afford to impair our franchise.Q: Where else is the business changing?
Ward: If you look at the biggest institutions in fund management, ones that spend $1 billion every year on Wall Street and in the City, most are consolidating the number of brokerage firms that they do business with. Some are saying: "We will pay $1 billion to our suppliers." So the top five get $100 million each, the others get the rest. We can't afford not to be in the $100 million club. The "superleague" concept that started in investment banking is now being applied across the business. And this makes sense. Look at the scale of businesses like Deutsche Asset Management and AXA. The train is accelerating. There will be further consolidation.Q: Are you adding people in any of your European businesses?
Weinberg: We are growing in parts of our fixed-income business, including structured finance, credit derivatives, and distressed debt. And we are hiring people in equity research.Q: How about Germany?
Weinberg: The importance of Germany can't be overstated. It represents a huge opportunity. The question right now is the pace of reform. That affects profitability in the short term, but not our commitment.