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Bankers Will Be Fine Being Paid In Forms Other Than Money, Say Consultants

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I confess I was pretty much unable to read this BCG report about what banks are going to do with themselves in the scary end times. In my day I have learned English, Latin, and legalese and some other languages to boot, but I am old now and I cannot figure out Consultant. I'll just give you a chart for, like, no reason at all:

The little mini-chart of FICC revenues in the bottom center entertained me a little. I submit to you that if your solid cone of potential FICC revenues 2012-2015 is so much narrower than that HORRIBLE JAGGED GASH of negative revenues in 2008, then you do not have a sufficiently active imagination. Anyway that's what Paul Volcker thinks.

But you don't care about revenues; Bloomberg's writeup correctly focuses on the only thing you care about which is comp. Short answer: down. But here is where BCG gets all outside-the-box, and suggests that you may want to start thinking of "comp" to mean things that are not, strictly speaking, money, or as they put it, and I swear I am not making this up, start thinking "holistically":

Reworking Compensation and Benefits. As revenues and profits decrease, banks will need to find new incentives to retain their top talent. Compensation ratios (total employee compensation as a percentage of revenues) in the CMIB industry have historically been around 40 to 50 percent. But lower ROEs may put an end to this standard.

Furthermore, stringent new regulations on bonuses [etc]. ... Therefore, generally speaking, cash bonuses paid out in any given year may be dramatically lower than in many past years.

Since this situation could drive leading performers to nonregulated entities, banks will need to shift to more holistic compensation strategies. These should encompass both qualitative and quantitative assessments, a clear career progression, tightly controlled titles and job profiles, and opportunities to develop through training, switching business units, or further education.

Enjoy! Sure you won't get paid, but you will enjoy such perks as switching business units and tightly controlled titles.

That ... seems right, right? As ROEs go down it actually probably does become harder to justify throwing scads of money at bankers and traders. Will that "drive leading performers" to hedge funds? Probably. Will those "leading performers" be retained by continuing education or more informative annual reviews? Um. I suspect "leading performers" on some metrics - I'm sure BCG can give you some - will be retained by those measures. Performers who are leading in fields like educating themselves, progressing their careers, and moving around business units will do great. Performers whose thing is more "make shitloads of money in risky ways," not so much.

The "make banks boring again" idea can't really be accomplished with just regulation. If you regulate away prop trading, banks will confuse and overwhelm you until you postpone and water down your Volcker Rule. If you regulate higher capital standards, smart motivated bankers will do amazing things to get around them. Moving banks from levered dealers of financial risk to boring utilities, if it's something you want to do, requires a shift not in rules but in people, from people who want to make money by taking risk intelligently to people who want to optimally manage a utility. Change the incentives and you - slowly, over time - change the people. Lowering pay and replacing it with the sorts of rewards that attract ... how to put this ... consultants? ... might just do the trick.

BCG: Investment Banks Face Tall Challenge-Improve Profits and Polish Image [BCG]
Tough Decisions and New Directions [BCG Perspectives, give 'em your email address]
Banks Likely to Cut Pay, Staff, Boston Consulting Says [Bloomberg]


So Maybe Greek CDS Will Be More Than Fine?

Gaaaaaaaaaaaaaaaah Greece. Okay so all systems appear to be go on the Greek debt exchange, which means its time to decide What This Means, and, I just. Really. Greece. Come on. All I want is to talk about 13D reporting requirements, and now I have to pay attention to Portugal? No. Just no.* Still here is arguably a fun factoid: On Wednesday, Swiss bank UBS AG started quoting a "gray market" in new Greek sovereign bonds ... using as a guide details of the debt swap Greece has put on the table for private investors to accept until Thursday evening. The "bid" price for a batch of future Greek bonds due in 2042, or the highest price the dealer was willing to pay, was around 15 cents on the dollar; the "offer" price, or the most the dealer was willing to sell at, was 17 cents on the dollar, the first person said. ... The prices quoted by UBS imply that losses private creditors to Greece will take are more like 79% of face value, not the original haircut of 70-75% many had expected. Yeah but. If you believe this horrible CDS mechanics stuff that various people including me have been yammering about for weeks - here is the best explanation - that means that if for some reason you had the foresight to be long Greek bonds and hold CDS against them you'd end up with a package worth (1) 21 on the bonds and (2) 83 on the CDS (assuming that the 17 offer for the 2042 bonds represents a real price for the cheapest-to-deliver new bond in the Greek auction) for (3) 104 total which is (4) more than par, so you win this particular game, yay. Which you were at risk of losing - a week ago one of our fearless commenters spotted the longest new bonds at 25ish vs. 24ish for the old-bond-y package, for a total of 99 for the hedged holder - losing 1 point versus par.**