Morning Coffee – Traders versus bankers at Goldman Sachs and Bank of America. The Barclays bankers who want to make UBS the best of the second-best
As many have been predicting for a while (including us), the 2023 compensation committee meetings are likely to see some of the most aggressive and vicious political infighting in years. The matter at issue is the perennial problem in a year when overall revenues have been, for the most part, disappointing – how much “subsidy” goes from the bonus pools of teams which have had a relatively good year to fill up relatively empty pools elsewhere?
The same kinds of arguments will play out across the Street, but they hit a little bit differently depending on whether the overall pool is up or down, and for what reasons. Currently, Goldman Sachs and Bank of America are looking at raising compensation, for example. In Goldman’s case, this is mainly because they have some space to do so – the 2022 pool was cut very aggressively, meaning that they’ve got some scope to course-correct. Bank of America has a somewhat different situation – the trading franchise has clearly made significant market share gains and may even have grown revenues year-on-year in a falling market, so people are going to have to be paid.
Meanwhile, at JPMorgan and Citigroup, the current informed consensus seems to be that the overall pools are more likely to be flat on the trading side and flat to down for advisory bankers. And within these broad averages, it’s likely that rewards will be significantly more concentrated than in recent years. As David Solomon said on the Goldman Q3 conference call, the market for the top talent “remains very, very strong”.
And this means that there has to be a forward-looking element to the compensation strategy as well as backward-looking. Even if the M&A franchise has had a year to forget, there is always the possibility of a sudden recovery, in which case it would be incredibly frustrating to have all your top dealmakers on gardening leave. Whether the overall pool is up small or down small, the market rate is the market rate, and the private credit industry is still staffing up.
How do you square this circle? In all probability, by taking the available pot and concentrating it as much as possible on the few people who really have to be kept happy. It seems likely that this bonus season is going to see, to an even greater extent than last year, fair-to-middling payouts to people who are genuinely indispensable franchise players, flat-to-within-a-rounding error for solid revenue generators and doughnuts for everyone else.
Which is probably how one can reconcile the numbers being talked about by informed yet anonymous insiders with the staff expectations. People who think they’re going to have a good year are much more likely to respond to a survey than people who don’t, and almost nobody is going to say out loud that they’ll be grateful to get anything.
So although there will be acrimony behind closed doors, don’t expect too much negative emotions being expressed in public when the numbers are given. Most banks appear to have managed expectations reasonably well, and people who end up being told that they’re much less indispensable than they thought they were are hardly likely to advertise the fact.
Elsewhere, when you combine the strengths of UBS and Credit Suisse, what do you get? According to Rob Karofsky, the ambition is to be the 6th biggest bank by revenue in the Americas.
That might seem an oddly specific and unambitious goal, but there’s logic to it – the number 6 ranking is potentially a “sweet spot” for a foreign bank. Basically, the domestic bulge bracket (Goldman, JPM, Morgan Stanley, BoA and Citi) have a natural claim on the top five slots. There is some variability from year to year, but the historic record shows that foreign banks which make a serious attempt to challenge their dominance tend to regret the experience. (Examples that come to mind might be 00s Deutsche and 2010s Credit Suisse).
The incumbents just have too much of a structural advantage in their domestic market, so anyone challenging them ends up having to spend years of investment in “bulge bracket costs with mid-tier revenues”. This can be supported in a very strong bull market, but the first downturn usually undoes everything. So “sixth place” basically means “the top European player, unless someone else is doing something dumb”.
In order to reach that status, UBS will need to build back a franchise which was once a solid top ten player, but which has more recently somewhat withered, as the bank switched its strategy to wealth management and Asia. Marco Valla, hired last year from Barclays, is going to be spearheading this initiative, and so far he has brought at least ten follow-on hires. It looks like they’re going to be number 12 for 2022, so there’s six places left to climb.
UBS has acquired an activist investor, but so far Cevian Capital have just put out friendly-but-slightly-troubling press releases saying that they’re all happy with everything for the time being. (Financial News)
Ardith Lindsay’s lawsuit against Citigroup carries on (and continues to be vigorously defended by Citi, which highlights its record of improved gender representation). She suggests that she’s receiving emails from across the Street detailing bad behaviour aimed even at the most senior female employees. (Bloomberg)
BNY Mellon CEO Robin Vince is telling employees to calm down and “narrow their focus to client and core business activities” for the last two weeks of December, possibly the first time that a top banker has recognised reality in this way. (Business Insider)
Crispin Odey has been removed from the approved senior managers register, but the FCA investigation into Odey Asset Management is not going to result in any action against anyone else or any further sanctions on him. (Financial News)
“He’s making a list / He’s checking it twice / It’s a list of previously unrevealed Jeffrey Epstein associates / So let’s really hope he’s checking it twice”. Court documents with more than 150 people identified (potentially including a few bankers) are going to be unsealed in January (ABC News)
A profile of Kym Armone, who has built Jefferies into a powerhouse in the muni bond sector from the ground up, including inventing a new kind of bond to securitise states’ revenues from tobacco lawsuits. (Bloomberg)
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