Archive for  September 2014

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The Financial Times reports that banks’ attempts to sidestep the EU bonus cap could be about to go disastrously wrong just months before the 2014-15 bonus round. It’s all down to the European Banking Authority, which has finally come good on its threats to clamp down on cash allowances. If cash allowances are to be allowed, the FT reports that they will need to be i) awarded for a set period and impossible to adjust midterm without staff consent, ii) to include no forfeiture provisions if someone quits, iii) to be attached to a job rather than a person. Points i) and ii) sound like good news for bankers who’ll then be assured of receiving allowances and can switch jobs without paying them back. Point iii) sounds more dubious. – The FT says everyone with the same job title would need to receive exactly the same allowance and salary, with capped bonuses the only element of performance-related pay. Banks have three months left to devise job titles that discriminate on the basis of performance and to categorise people accordingly.

Where is Goldman Sachs hiring? If you’ve been paying attention to presentations by CEO Lloyd Blankfein and COO Gary Cohn, you’ll already know the answer: Goldman Sachs is hiring in ‘high value locations.’ Where are these high value locations? Try Salt Lake City. But more than that, try Bangalore.

Goldman has around 1,800 people in Salt Lake City. That’s a lot of staff. But that’s nothing compared to Bangalore. Goldman reportedly already has 5,400 people in the Indian city, and it’s just declared its intention to invest $200m in a new campus that can hold up to 9,000 people in total. Will Goldman be making 3,600 new Indian hires then? Maybe, but it won’t be doing so for a while – the new building won’t be finished until 2018.

A few times in the past several decades it has sounded as if big Wall Street banks were losing their hold on the graduates of the world’s most selective universities: the early 1990s, the dot-com boom and the immediate aftermath of the global financial crisis (Teach for America!). Each time the graduating class of Harvard and Yale looked as if it might decide, en masse, that it wanted to do something with its life other than work for Morgan Stanley.

Each time it turned out that it didn’t.

Silicon Valley is once again bubbling, and, in response, big Wall Street banks are raising starting salaries, and reducing the work hours of new recruits. But it’s hard to see why this time should be any different from the others.

Technology entrepreneurship will never have the power to displace big Wall Street banks in the central nervous system of America’s youth, in part because tech entrepreneurship requires the practitioner to have an original idea, or at least to know something about computers, but also because entrepreneurship doesn’t offer the sort of people who wind up at elite universities what a lot of them obviously crave: status certainty.

“I’m going to Goldman,” is still about as close as it gets in the real world to “I’m going to Harvard,” at least for the fiercely ambitious young person who is ambitious to do nothing in particular.

The question I’ve always had about this army of young people with seemingly endless career options who wind up in finance is: What happens next to them? People like to think they have a “character,” and that this character of theirs will endure, no matter the situation. It’s not really so. People are vulnerable to the incentives of their environment, and often the best a person can do, if he wants to behave in a certain manner, is to choose carefully the environment that will go to work on his character.

One moment this herd of graduates of the nation’s best universities are young people — ambitious yes, but still young people — with young people’s ideals and hopes to live a meaningful life. The next they are essentially old people, at work gaming ratings companies, and designing securities to fail so they might make a killing off the investors they dupe into buying them, and rigging various markets at the expense of the wider society, and encouraging all sorts of people to do stuff with their capital and their companies that they never should do.

Not everyone on Wall Street does stuff that would have horrified them, had it been described to them in plain English, when they were 20. But enough do that it makes you wonder. What happens between then and now?

All occupations have hazards. An occupational hazard of the Internet columnist, for instance, is that he becomes the sort of person who says whatever he thinks will get him the most attention rather than what he thinks is true, so often that he forgets the difference.

The occupational hazards of Wall Street are more interesting — and not just because half the graduating class of Harvard still wants to work there. Some are obvious — for instance, the temptation, when deciding how to behave, to place too much weight on the very short term and not enough on the long term. Or the temptation, if you make a lot of money, to deploy financial success as an excuse for failure in other aspects of your life. But some of the occupational hazards on Wall Street are less obvious.

Here’s a few that seem, just now, particularly relevant:

— Anyone who works in finance will sense, at least at first, the pressure to pretend to know more than he does.

It’s not just that people who pick stocks, or predict the future price of oil and gold, or select targets for corporate acquisitions, or persuade happy, well-run private companies to go public don’t know what they are talking about: what they pretend to know is unknowable. Much of what Wall Street sells is less like engineering than like a forecasting service for a coin-flipping contest — except that no one mistakes a coin-flipping contest for a game of skill. To succeed in this environment you must believe, or at least pretend to believe, that you are an expert in matters where no expertise is possible. I’m not sure it’s any easier to be a total fraud on Wall Street than in any other occupation, but on Wall Street you will be paid a lot more to forget your uneasy feelings.

— Anyone who works in big finance will also find it surprisingly hard to form deep attachments to anything much greater than himself.

You may think you are going to work for Credit Suisse or Barclays, and will there join a team of professionals committed to the success of your bank, but you will soon realize that your employer is mostly just a shell for the individual ambitions of the people who inhabit it. The primary relationship of most people in big finance is not to their employer but to their market. This simple fact resolves many great Wall Street mysteries. An outsider looking in on the big Wall Street banks in late 2008, for instance, might ask, “How could all these incredibly smart and self-interested people have come together and created collective suicide?” More recently the same outsider might wonder, “Why would a trader rig Libor, or foreign exchange rates, or the company’s dark pool, when the rewards for the firm are so trivial compared with the cost, if he is caught? Why, for that matter, wouldn’t some Wall Street bank set out to rat out the bad actors in their market, and set itself as the honest broker?”

The answer is that the people who work inside the big Wall Street firms have no serious stake in the long-term fates of their firms. If the place blows up they can always do what they are doing at some other firm — so long as they have maintained their stature in their market. The quickest way to lose that stature is to alienate the other people in it. When you see others in your market doing stuff at the expense of the broader society, your first reaction, at least early in your career, might be to call them out, but your considered reaction will be to keep mum about it. And when you see people making money in your market off some broken piece of internal machinery — say, gameable ratings companies, or riggable stock exchanges, or manipulable benchmarks — you will feel pressure not to fix the problem, but to exploit it.

— More generally, anyone who works in big finance will feel enormous pressure to not challenge or question existing arrangements.

One of our financial sector’s most striking traits is how fiercely it resists useful, disruptive entrepreneurship that routinely upends other sectors of our economy. People in finance are paid a lot of money to disrupt every sector of our economy. But when it comes to their own sector, they are deeply wary of market-based change. And they have the resources to prevent it from happening. To take one example: in any other industry, IEX, the new stock market created to eliminate a lot of unnecessary financial intermediation (and the subject of my last book) would have put a lot of existing players out of business. (And it still might.) The people who run IEX have very obviously found a way to make the U.S. stock market — and other automated financial markets — more efficient and, in the bargain, reduce, by some vast amount, the take of the financial sector. Because of this they now face what must be one of the best organized and funded smear campaigns outside of U.S. politics: underhanded attacks from anonymous Internet trolls, congressional hearings staged to obfuscate problems in the market, by senators who take money from the obfuscators; op-ed articles from prominent former regulators, now employed by the Wall Street machine, that spread outright lies about the upstarts; error-ridden pieces by prominent journalists too stupid or too lazy or too compromised to do anything but echo what they are told by the very people who make a fortune off the inefficiencies the entrepreneurs seek to eliminate.

The intense pressure to conform, to not make waves, has got to be the most depressing part of all, for a genuinely ambitious young person. It’s pretty clear that the government lacks the power to force serious change upon the financial sector. There’s a big role for Silicon Valley-style scorched-earth entrepreneurship on Wall Street right now, and the people most likely to innovate are newcomers to the industry who have no real stake in the parts of it that need scorching.

As a new employee on Wall Street you might think this has nothing to do with you. You would be wrong. Your new environment’s resistance to market forces, and to the possibility of doing things differently and more efficiently, will soon become your own. When you start your career you might think you are setting out to change the world, but the world is far more likely to change you.

So watch yourself, because no one else will.

(Bloomberg) Royal Bank of Canada hired credit
trader David Kashetta from Nomura Holdings Plc as it expands its
U.S. debt unit, according to two people with knowledge of the

Kashetta, a former Boston College football player, will
join the firm’s New York office in November as a senior trader
focusing the debt of investment-grade energy and utility
companies, said the people, who asked not to be identified
because the move hasn’t been announced. Kashetta didn’t respond
to e-mail messages, while Kaitlin Conetta, a spokeswoman for
RBC, said she couldn’t comment.

Canada’s second-largest lender by assets has been
increasing its brokerage team amid a surge in the volume of
dollar-denominated corporate bonds, a market that’s grown 83
percent since the end of 2008. RBC is the 11th most-active
underwriter of U.S. investment-grade bonds this year, up from
14th in 2012, according to data compiled by Bloomberg.

Kashetta, 33, who had been with Nomura since May 2011,
previously worked at BNP Paribas SA and Bear Stearns Cos.,according to Financial Industry Regulatory Authority records.

Before his career on Wall Street, he played tight end on Boston
College’s football team and subsequently signed with the
Washington Redskins before joining Bear Stearns in 2006,
according to Finra records and the school’s website.

Investment-grade bonds in the U.S. have returned 6 percent
this year following a 1.5 percent loss in 2013, the first annual
decline since 2008, Bank of America Merrill Lynch index data
show. Companies have sold $899 billion of the notes this year,
2.3 percent more than the $878 billion issued in the same period
of 2013, Bloomberg data show.

(Bloomberg) — Bank of America Corp., the second- largest U.S. lender, hired Deutsche Bank AG trader Sidney Lebental to join the firm’s rates desk, said two people with knowledge of the move.
Lebental, a 32-year-old French citizen, was the German bank’s top revenue-producing Treasuries trader, said the people, who asked not to be identified because the move hasn’t been announced. He was hired by Charlotte, North Carolina-based Bank of America yesterday and will begin in a month, they said.
Bank of America is seeking to gain share in rates trading against bigger rivals JPMorgan Chase & Co., Goldman Sachs Group Inc. and Deutsche Bank. Record low volatility across asset classes has pressured Wall Street trading revenue and stoked demand for proven moneymakers.
Lebental, who received a doctorate in mechanical engineering in 2008 from Duke University, had been with Deutsche Bank Securities since July 2008 and focused on Treasuries due in 10 years or longer. He was a vice president at Deutsche Bank and joins Bank of America as a director in New York.
Lebental and Amanda Williams, a spokeswoman for Frankfurt- based Deutsche Bank, declined to comment on the move, as did Bank of America’s Zia Ahmed.

(Bloomberg) The U.K. takes its fight against European Union banker-bonus limits to the bloc’s highest court next week, seeking to overturn a ban on awards of more than twice fixed pay.

The European Court of Justice will hear the British challenge on Sept. 8, as EU regulators vow to crack down on banks that try to get around the rules. Barclays Plc (BARC), HSBC Holdings Plc (HSBA), Lloyds Banking Group Plc (LLOY) and Royal Bank of Scotland Group Plc are among the lenders that have taken steps to circumvent the bonus limit.

“If you run to the court because you lost the democratic argument, it’s a sign of the weakness of your argument,” Sven Giegold, a German lawmaker in the European Parliament’s Green group and a supporter of the pay curbs, said by telephone last week. “Nobody can deny that the bonus culture has contributed to the harm we have seen all over the world and, ironically, particularly in Britain.”

EU lawmakers campaigned for the bonus limits in a bid to rein in the gambling culture blamed for helping trigger the 2008 financial crisis. They reached a deal with national governments last year to overrule U.K. opposition and include the measure in legislation that overhauled the bloc’s banking rule book.

The rule is set to kick in next year, when it will apply to bonuses awarded based on bankers’ performance in 2014. The EU court has no deadline for issuing a ruling.

“Many banks in the U.K. expect the worst from the ECJ, so have already factored in the bonus cap by planning to increase fixed salaries, resulting in less alignment between performance and pay,” said Syed Kamall, a U.K. lawmaker who leads the EU parliament group that includes British Prime Minister David Cameron’s Conservative Party.

“At worst, the ECJ will ratify an era of higher basic salaries, meaning less alignment between pay and performance,” he said. “At best, it will strike down the bonus cap, giving the FCA and the Bank of England the freedom to monitor and restrict the types of bonuses offered,” he said, referring to U.K.’s Financial Conduct Authority.

Banks including Barclays, HSBC, Lloyds and RBS have begun to pay staff partly through “allowances” that can vary from year to year, and that they don’t count as variable pay.

Andrea Enria, chairman of the European Banking Authority, which oversees how regulators apply EU rules, has said his agency is scrutinizing the practice and will issue guidance by the end of the year.

The EU bonus cap has ‘‘damaging consequences and perverse incentives,’’ U.K. Chancellor of the Exchequer George Osborne said earlier this year. “We are using the European court to enforce European principles of non-discrimination and adherence to European law.”

Salaries for senior bankers rose an average of 26 percent in 2012 as banks prepared for bonus caps, the EBA said in a June report, which surveyed 137 banks across the EU. This signals a “material shift from variable to fixed remuneration,” it said.

Britain was home to 2,188 investment bankers earning more than 1 million euros in 2012, the most in the EU, while Spain had 37, according to EBA data. France and Germany had 117 and 100, respectively. Top U.K. investment bankers were paid an average of 1.95 million euros in 2012, the most in Europe, and had an average bonus-to-salary ratio of 370 percent, according to the survey.

The U.K. has filed a series of legal arguments with the EU court, according to documents published on the ECJ’s website. These range from allegations that the new rules go beyond what’s possible under the EU’s treaties, to arguments that too much power is handed to the EBA to flesh out how the rule should be applied.

The pay curbs are “clearly justified,” said Paul Tang, a Dutch center-left member of the EU parliament’s Economic and Monetary Affairs Committee. Lawmakers “are trying to change incentives to curb excessive risk-taking. We want to learn lessons from the financial crisis, and put these lessons to use. And we want to bridge the gap between bankers and voters.”

While the EU has no specific competence to regulate pay, it can set rules for bankers’ bonuses under its mandate to use regulation to protect financial stability, Giegold said. “The legal base is convincing.”

The U.K. also says the measure infringes principles in international law by applying the curbs beyond the EU’s border.

Under the legislation, the rule will apply to employees of EU banks who are based overseas and to staff of U.S. and other foreign banks who are based in the EU.

The EU approach shares some similarities with measures introduced in the Netherlands, where an industry code of conduct limits bonuses for top banking executives to 100 percent of salaries.

“One of the complaints against the measure has been that it may lead banks to push up fixed salaries, but what we have seen in the Netherlands is that if you do that you will get a public backlash,” Tang said. “There we had the case of ABN AMRO which tried to increase fixed salaries, and this led to public uproar.”

The Dutch government is planning to introduce a tougher ban on bonuses worth more than 20 percent of fixed pay starting in 2015. The planned measures do contain some exceptions for banks outside of the Netherlands or the EU.

The bonus rule challenge is one of a series of court battles the U.K. has embarked upon against EU financial rules, and it is on a losing streak.

Britain last year failed to overturn EU powers to ban short selling, and was told in April that an early challenge against a financial-transaction-tax plan was premature. The U.K. is also contesting ECB policies on clearinghouses that it says discriminate against countries outside the euro area.