UBS investment bankers yesterday learned that their bonus pool would be down by 60%, and that anyone inclined to grumble to division head Carsten Kengeter should be aware that (1) he would have none of it and (2) he himself was taking a bonus of zero, so see point (1). Rank-and-file bankers were perhaps a mite peeved, but they learned today that they have nothing to complain about compared to their formerly better-compensated elders, for whom “down 60%” or “zero bonus” would be an absolute joy when the reality is more like this: Continue reading »
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Bonus Watch ’12: UBS Investment Bankers Thought Zero Was The Minimum Bonus? They Thought Wrong
By Matt Levine-
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Deutsche Bank Treasures Its Reputation (For Making Economically Questionable Decisions) So Much That It Turned Down Free Money
By Matt Levine
You may have heard that some shit is going down in Europe. This came as some surprise to me since I stopped paying attention to that whole continent when the banks were all fixed in December. What could possibly go wrong? I asked myself loudly, to drown out all the “Greece talks near [success / catastrophe]” I’d otherwise be hearing. Well, for one thing, some of those banks actually refused to be fixed just because they were, and I hope I’m representing their claims accurately here, “not broken”:
“The fact that we have never taken any money from the government has made us, from a reputation point of view, so attractive with so many clients in the world that we would be very reluctant to give that up,” said Josef Ackermann, Deutsche Bank’s chief executive, explaining to analysts last week why the German lender didn’t borrow from the ECB.
Mr. Ackermann said Deutsche Bank still is scarred from its experience borrowing from the Federal Reserve in the first phase of the financial crisis in 2008. U.S. regulators encouraged banks to borrow under the cloak of promised confidentiality, but when the banks’ identities were subsequently disclosed by the Fed, the recipients were dubbed bailout recipients. “We learned a lesson,” Mr. Ackermann said.
It’s a valuable lesson. While once government largesse was free and secret, we’ve recently seen all sorts of strings being attached to bailouts, from minor inconveniences like “if you take our bailout we’ll make you pay off (some of) your debts” to game-changing restrictions like “I don’t want my tax dollars to be used for some sort of pro-gay stunt like this.”* Continue reading »
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Credit Suisse Traders Made The Unusual Mistake Of Committing CDO Fraud On Themselves
By Matt Levine
I’ve been thinking a lot about financial industry compensation recently, and probably so have you, for different reasons. As a non-recipient of said compensation, I’ve been waxing philosophical about how your bonus can incentivize you either to put on low-risk trades that are unlikely to blow up your firm or to go instead with high-risk overlevered bets that look good in December but will leave the place a smoking ruin in March, by which point you’ll be out of there with your pile of bonus CLOs. But if you don’t take kindly to other people telling you what to do / “incentivizing” you to do it, there’s always the do-it-yourself bonus, either in the traditional form (write checks to self) or in the slightly more complicated form of writing down the amount of money that you would like your trades to make, then getting a bonus based on the number you wrote down: Continue reading »
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Volcker Rule Will Be Bad For European Governments, Say European Government Ministers Who Were Told By Banks That The Volcker Rule Would Be Bad For Them
By Matt Levine
I’ve been pretty skeptical of the whole Volcker Rule thing because I don’t really understand the conceptual division between “making bets with your own money” and “market making,” and I’ve been gratified to see that paid financial industry mouthpieces are on the same page. Now it’s nice to see unpaid mouthpieces agreeing too:
Yet finance ministers from around the world lined up to whisper in the ear of Timothy Geithner, the Treasury secretary, who made the rounds in Davos on Thursday and Friday, about a specific element of the Volcker Rule that has them apoplectic: The rule says that United States banks — and possibly certain foreign banks that do business in America — would be restricted in trading foreign government bonds. Yet the rule, conveniently, provides an exemption for United States government securities. Every other country is out of luck.
The measure, critics say, is likely to increase borrowing costs for foreign governments, reduce liquidity and make the market for foreign government bonds more volatile, the opponents charge. In the end, it may fall into the category of unintended consequences of a proposed new regulation.
So, yeah, totes agreed, but for diversity here is a more measured view:
The Volcker rule is, in many ways, a riddle wrapped in a mystery. It is impossible to know what the impact on market liquidity will be. Foreign banks, or non-banks, may step into the fray to pick up the slack… or perhaps the impact of the rule won’t be that big on US banks, anyway. Without a set of final rules, a period of time to watch them in action, and a parallel universe to see what would have happened if they hadn’t been implemented, it’s all speculation.
Again, I come down on the side of robust market-making by banks being a good thing and so I suspect those lined-up-and-whispering finance ministers are right, but it’s also true that that’s just, like, my opinion, man, and nobody really knows what will happen but if I were Citadel I’d be lobbying like crazy for the Volcker Rule and promising European governments that I’d make awesome tight markets in their bonds. Continue reading »
One reason that you’re in for seven lean years in the investment banking business is that bank capital requirements are going up due to Basel III, and “capital is expensive” in some loose sense, so banks will have less money to use to make loans and/or pay you. Some people think that this is mostly bull, because capital is not actually any more “expensive” than any other form of funding, though those people often actually don’t care that much about paying you so it may not be worth listening to them. In any case here is the abstract to an amusing new paper by Karlo Kauko of the Finnish central bank, because yes I make a point of being up to date on everything published by the Finnish central bank:
Bank managers often claim that equity is expensive relative to debt, which contradicts the Modigliani-Miller irrelevance theorem. … An opaque bank must signal its solvency by paying high and stable dividends in order to keep depositors tranquil. This signalling may require costly liquidations if the return on assets has been poor, but not paying the dividend might cause panic and trigger a run on the bank. The more equity has been issued, the more liquidations are needed during bad times to pay the expected dividend to each share.
Don’t worry if you don’t get that name dropping, it doesn’t matter. Also don’t worry too much about the paper itself, which is amusing but also sort of nuts.* The basic idea to come away with is that bank equity is where the bank puts all its hopes and dreams, and that, if banks are more or less reflections of hopes and dreams, the people who provide the real funding for the banks – repo counterparties and clearing banks and suchlike – are going to be inordinately influenced by reading equity tea leaves. Because what else are they going to read? Continue reading »
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For A Bank, Bank of America Has A Pretty Loose Definition Of The Word “Cash”
By Matt Levine
You can’t argue with this:
Last year, the cash portion of bonuses was paid entirely in cash.
Well glad that’s cleared up then! Anyway the actual story is not complete nonsense:
Bank of America told senior bankers this week that the cash portion of investment-bank bonuses, the part that is payable immediately, will be paid 25% in cash and the rest in stock that vests immediately, said a person briefed on the matter. The shift applies to bonuses above $100,000. …
The same bankers also will receive a portion of year-end bonuses in the form of deferred stock, as they did last year. The deferred-stock amounts will vary according to overall pay. A bank spokeswoman declined to comment.
Maybe they’re using “cash” in the trading sense – meaning your “spot” bonus, as opposed to your “derivative” bonus, the one forward-settling in three years?
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Cuts are said to be going down at the House o’ Dimon. Continue reading »
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Paying Bankers In Derivatives Worked Out So Well For Credit Suisse That They’re Going To Do It Again
By Matt Levine
Dealbreaker has long admired Credit Suisse for being on the cutting edge of creative approaches to compensation. In 2008, they gave bankers bonuses consisting of “toxic assets” to (1) incentivize the risk-takers to stick around and (2) remind people that “toxic assets” is a meaningless term if you don’t consider price. That worked out okay. This year, they’re giving junior mistmakers bonuses consisting of nothing, as a gentle reminder that there are other, similarly nonremunerative careers that might be better suited to their interests and talents. That also seems to be working. And now there’s this piece of magic:
Credit Suisse Group AG, Switzerland’s second-biggest bank, plans to pay a portion of senior employees’ 2011 bonuses in bonds packaged from derivatives linked to about 800 entities.
The move “is a risk transfer from the firm to employees,” Chief Executive Officer Brady Dougan, 52, wrote in a memo to the firm’s staff and obtained by Bloomberg News. “We are trying to strike the right balance and align employees with shareholders. These measures help to put us in a good place and to perform well in 2012.” …
The bonds mature in nine years and will pay a coupon of 5 percent for Swiss franc holders and 6.5 percent in U.S. dollars “for holders elsewhere,” Dougan wrote. Credit Suisse will absorb the first $500 million of losses on the portfolio, according to the memo.
How can you not love this? My favorite part is that shareholders eat the first tranche of losses. OOOH NO BANKSTERS ROBBING SHAREHOLDERS, you think – well, not you, but someone thinks – except no. Continue reading »
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David Viniar’s Anti-Regulator Message On The Goldman Sachs Earnings Call Is Much Subtler Than That Of Some People He Could Name
By Matt Levine
Like I mentioned earlier, the David Viniar show this morning is a good time in its (relatively) quiet way. If, like me, you’ve drunk the GS we-understand-risk Kool-Aid, you’ll particularly enjoy Viniar’s take on capital requirements, which is – and I say this as a compliment – pretty cynical. Now, one thing that you might have in your arsenal of thoughts about bank capital is something along the lines of “capital requirements are a way of forcing bank managers to confront the risks of their positions and fund those positions in a loss-absorbing way to protect their creditors and the financial system more broadly.” Your faith in that position should I think be a little shaken by some of the Viniar Q&A. For instance:
Roger A. Freeman – Barclays Capital: [H]ow are you charging the desks for capital at this point? Is it on a Basel I basis or Basel III or some combination?
David A. Viniar: … As far as how we’re charging the desks, that’s a little bit of a complicated question. And we’re working through that now, and it — there’s no one-size-fits-all yet. And we have to be careful. As you know, Basel III does not kick in for quite a while, and quite a bit of what we do is very short dated. And so we don’t want to charge desks on a Basel III basis, have them turn down profitable opportunities that would be long gone from our balance sheet long before Basel III ever kicks in. So we’re really taking into consideration the tenor of what we do and trying to figure out what capital regime we’re going to be under. And it’s still — I would say, we’re going through a transition process here.
On the one hand, totally unsurprising and unobjectionable. On the other hand note the pragmatism: if and when our regulators are going to charge us for capital under the (generally higher) Basel III rules, we will charge desks for capital based on those rules. If not, not. The rules are the rules and the transition to new rules will be made in accordance with the rules. Only. If you thought “well, Basel III will improve the health and safety of banks by steering them away from the riskiest worst scariest products” – guess what, Goldman disagrees. They’ll manage capital to whatever regime is in place, as a matter of complying with regulation, but the capital rules appear to have no effect whatsoever on how they actually think about the risks of their assets, trades and businesses.
Are they wrong? Continue reading »
I know I’ve said that the Jamie & Doug in the Morning Show is the best call-in program in finance, given Jamie Dimon’s reliably amusing anti-regulation rant, but the true connoisseur should also really get a kick out of David Viniar’s calmer, wonkier, more NPR-appropriate chat. I certainly do. We’ll maybe have more to say about it later.
My enjoyment is, however, complicated by the fact that at this time of year I feel certain feelings. Specifically, feelings about Goldman Sachs comp, which will be terrible, horrible, down 115%, whatever, and yet … still … somehow … I want it. Have we talked about this before? Sometimes I miss investment banking. A thing that some people not in the industry don’t know about investment banking is that it is an awesome job, in the specific sense that many people would do it for free, or even pay money to do it, and in the even more specific sense that sometimes they do. (For, um, fairly loose definitions of “pay money.”) This happened twice during my time at Goldman. Let’s all luxuriate in a chart:
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The aforementioned cuts continue, today reaching the newest residents of the House of Moynihan: Continue reading »
