Tuesday, December 16, 2008

A Simple Desultory Philippic

It's the last work week of the year, and Macro Man is feeling the strain. After a skein of lunches, dinners, and assorted Christmas treats, he's begun to feel the inevitable expansion of the waistline despite his best efforts at the gym.

Yesterday he had lunch at Nobu with a couple of friends from a well-known (and, shall we say, "underperforming" bank.) It was an interesting afternoon, to say the least- not least because at least a quarter of the tables at the restaurant were empty. Long gone are the days of requiring several weeks' notice to secure a table...the reality of the recession is indeed beginning to bite.

But what stirred Macro Man's blood was the discussion around the current environment and the compensation expectations of staff in the financial industry. Without disclosing any details about the institution in question (so as to protect the innocent), it is fair to say that 2008 has not been a profitable year for his friends' institution.

Macro Man's friend in management has, for the past year or two, been fairly realistic about the environment that he's been living and working in- that is to say, he's been consistently downbeat. For the past month or two, he has consistently been attempting to talk down the bonus expectations of his staff.

Now, it is safe to say that the performance of this institution has been sufficiently poor that shareholders can legitimately question why bonuses are being paid at all. So Macro Man naturally assumed that "managing expectations" involved telling people that "your job is your bonus....if you actually get to keep it."

And yet there is, evidently, a small bonus pool, which has generated an unseemly political scramble to secure as much as of the scraps as possible. To call the scenario "Machiavellian" is an insult to the whole concept of political philosophy. None of this should come as a surprise, of course; bankers should always wear a stab-proof Kevlar vest at the best of times.

But what really got Macro Man's goat was the (unhappy) explanation that one mediocre performer will be awarded a disproportionately large share of the team bonus pool because, as his friend's boss's boos explained "so-and-so got a seven figure bonus two years ago and will be disappointed with anything less this year."

DISAPPOINTED? DISAPPOINTED? Are you effing kidding me? One of the reasons why bankers get paid so much in the good times is because of "the volatility of the cycle". Well guess what, the cycle has swung, and it's time to pay the piper (rather than the banker.)

To claim that you deserve a bonus because "we had a good year" on the desk blithely ignores the act that "you" collectively have become a watchword for incompetence and/or malfeasance.

Now, Macro Man's views here a coloured by his own experience. At the beginning of the decade he joined a start-up asset management company, where he worked for three years. Despite decent performance the firm never attained critical mass during his time there, so he went three years with no bonus, because there was no money with which to pay one. Indeed, the only change to his compensation during his time there was a partners' salary haircut.

So when he hears people complaining about getting paid "only" 40-50% of last year's bonus, he wonders what it will take for reality to bite. Particularly galling are the satisfied comments from staff at one UK bank that they "expect to get paid" this year. This is an institution that was arguably hours away from going bust earlier this year, and would have done so but for the injection of public funds (which we'll all be paying for in years to come.) So why the hell are employees getting any sort of bonus?

Listen, Macro Man knows it's been a tough year, and has plenty of sympathy for people like his friend yesterday that have been put through the wringer this year. But his three years with no bonus at the beginning of the year were hardly a walk in the park- quite the contrary!

Macro Man isn't trying to hop up on some sort of populist, "bankers are evil" soapbox- quite the contrary. He's merely disgusted by "heads I win, tails you lose" set-ups, or the complete denial of responsibility for one's mistakes- whether they come in finance, government, or private life.

It would be nice to see people who are handsomely rewarded when they do well (or even manage a year of mediocrity) voluntarily put their hand up and accept responsibility when the worm turns. Banks are hardly alone in this regard, as plenty of hedge funds have been exposed as corrupt, incompetent, or merely unbelievably venal.

By the end of yesterday's lunch, however, it finally started to appear like market pros are owning up to their true lot in life.

It's often said that bankers and fund managers are tarts because they'll do anything for money. So it's perhaps fitting that "financier" now appears on the dessert menu at Nobu!


Anonymous said...

Having worked at the 'Brothers' for 7 years and seeing my total net worth going to zero, then no bonus, no redundancy, no contract payout, and only just got paid the salary for the month, then flipped out on my ear....i can confirm that having a job is a bonus ;-)

Manc Trader said...

My boss once told me that the golden rule for bonuses was: if they are unhappy but don't quit you paid the right amount.

I have a feeling this year most would not quit if they received no bonus. So by the rule the optimal bonus would be zero.

Anyway, I completely agree that high comp. in finance is related to the risk and volatility of a finance career.

Macro Man said...

On the sell-side, the value of "the seat" is generally undervalued by the occupants. With plenty of talent available from bank implosion/consolidation as well as the forthcoming hedge fund meltdown, it strikes me that all but the most talented of sell-side talent is largely fungible...and thus does not require a great deal of wedge to retain it in this of aall years.

Macro Trading Ideas said...

MM, totally agree with you, I've ever been paid a "real" bonus during my few career's years only because i've always worked in small financial firms and also this year, with best ever results for me and for my investment bank (thanks to me...) i'm expecting really little, but i know that i've managed money also to save my colleagues' work and money, and we're growing while every other is going bust. So i can't understand how a RBS, CITI & Co employees can expect any form of bonus.. please, is the same thing as a direct transfer from my wage and pension!!! It seems that we are working in the soccer's industry!
This industry has again a long way to do...

Boat52 said...

I had an employee who was running a business out of his office. A secretary revealed the extent of it. I reduced his bonus to zero and allowed him to keep his job because he had worked for the firm for a decade. He probably ran the business for many years. He had business cards/stationary with his office address and telephone number. In short, he complained bitterly to the personnel department who had the audacity to tell me I was being very harsh on him.

His biggest complaint was that he "counted on his bonus always being at least equal to or even larger than the year before". The HR person assigned to my business line took his part and tried to get me to change the zero bonus.

And so it goes on the Street.

Anonymous said...

MM - return to market commentary please, I used to read this blog for its keen insight into markets. Lately is has been a poorly pieced together string of complaints. Lets try to find interesting trades and themes for 2009 instead.

sig said...

this reminds me of cassandra's crunch Xmas menu blog, with delicacies such as Mrs Watanabe's inside-out deep fried crispy dragon....

chuck roast said...

a plant or animal that lives on or in another, usually larger, host organism in a way that harms or is of no advantage to the host is a...

Anonymous said...

MM very incisive piece. this year i have often felt like i am suffering from that mental illness whereby one thinks everyone else is crazy as it appears to me people in the industry just DO NOT GET IT.

Anonymous said...

well, we got our bonuses at the small IRP I work at, but we are a bare bones operation that just had its best year ever.

All the layoffs and cuts have left large institutions scrambling for un-biased research.

But our bonuses aren't extravagant, they are "working class-style" eg: one extra standard paycheck.

Anecdote: I was in Charlotte a few weeks ago and it was a ghost town, we strolled into one of the best restaurants in town on a Saturday night at 8pm and were escorted to the finest table. There were like 4 other parties in the whole place.

It's starting to bite, but it's hard to feel sympathy for people whose idea of "cutting back" is cutting their children's allowances from 100 to 60$/week, buying fewer 25$ cigars, etc.

Anonymous said...

MM- first, by way of disclosure, I whole heartedly agree that bankers should not expect a bonus in a year like 2008.

But by way of explanation... at several of these non-performing banks, senior management is on public record as being paid millions of pounds for the skill they demonstrated in running their bank into insolvency.

If Fred Goodwin gets paid millions of pounds severance for destroying RBS (and ABN) ... if Richard Fuld gets paid millions for destroying Lehman ... Bradford and Bingley, Wachovia, Northern Rock, Citibank, the list goes on and on.

Some of these CEOs worked for their respective bank for decades -- but they got paid for decades too. Should past years of service (or accounting flim flam in some cases?) automatically entitle them to millions of pounds this year?

Then we have the case of John Thain at Merrill ... sort of. He was brought in last spring if I recall to "save" the thundering herd. Within months, he was selling out to Bank of America-- not entirely voluntarily as he was attending the funeral of Lehman Bros and everyone suspected Merrill would be next. Does listing your company on E-Bay entitle a CEO to millions for barely six months work? If so, why should the M&A bankers get paid?

When firms are carelessly hurling around millions of pounds for incompetent management, it is not unreasonable for the rank and file to expect to be paid as well.

Should ***EVERYONE***, CEOs included tone down their expectations? I think so -- but I submit that CEOs ought to lead by example

FlashBang said...

Why are you still doing business with these Muppets then?

Anonymous said...

ok ill take the other side (to some degree)

first off--and MM you have kids as well so you know--life ain't fair---my kids used to be on me about what is fair but by the time they get to be 4 or 5 i got that drilled outof em--for whatever reason though we all seem to have forgotten that when it comes to bonuses and bailouts

i believe management should get next to ngt--but line producers who are having a great year in liquid products who finish with the year with no positions on the books--pay em---since we tax payers own the banks now I want sales people and and traders highly motivated--yea maybe the % payout goes from 12% to 7-8% but if you generate commission (or prop profits after adjusting for interest expense) i would pay these folks

yea i know the counter argument is what is there next best alt--and that is they sit there and do ngt or next to ngt--i want em trying to grind every nickle out of their seats knowning that they will get paid for that

biggest issue right now at both banks and funds is netting risk--what you do when the FX area is up 200 bucks and the structured credit area is down a yard--either on the bank side or fund side this is a problem--don't know how the banks solve it (and yea you could just say life ain't fair and it ain't but motivation will collapse) and on the fund side world will shift towards smaller single strat funds

one thing i know that works is incentive based comp--clearly how those incentives played out inthe past where not well thought out--but we going to hell on a road paved with good intentions which look like claw backs, deffered comp, company wide based comp etc

as a friend of mine said (PM at big fund) I never realized how much netting risk and defered comp risk I was taking--i won't let that happen again

Anonymous said...

Spot on. It's high time bankers realise the primary influence over their pay package is the general health of financial markets. Any departure from this procyclicality is a thin mask at best - individual meritocracy is probably a lot less well established than the industry likes to believe . I don't feel sorry for bankers in the bad times any more than I resent the fact that make a lot in the good. Such a pay arrangement comes with the territory.

Macro Man said...

Anon @ 12.48, I will cheerfully refund your subscription fee to whatever address you designate. As the "about" section says, "This blog is a repository of his views, concerns, rants, and, on occasion, poetic stylings." If you don't like the latter bits....feel free to not read 'em. Personally, I have nothing interesting to say of market direction at the moment.

Anon @ 2.57, I hear you...I had this very conversation this morning with someone. Hey, I know guys have done well...but I would still argue that the seat explains most of it, in the sense that if these chaps were sitting in a fund or sitting on a sofa, they wouldn't have had a chance to make that money.

As for the future, I would argue that the role of a government-owned bank should be that of a traditional commercial bank- ie, taking deposits and making loans, particularly given that no one else seems to be doing the latter. making prices in, oh, convertible bonds? IDR NDFs? I'm not so sure we need those guys in the government-controlled banks. And if we do...well, I am of the view that spreads will be sufficiently wide moving forwards that lesser-quality, lesser-cost talent can still turn a profit in that seat. I just find it unacceptable that costs on non-performing banks is socialized via future tax burdens on the population at large, but not by bonus donuts for those employed by the institution in question.

Is it fair? Perhaps not....but as you say, life ain't fair.

Anonymous said...

Coming from a bank trader's seat, I will play the devil's advocate here

First, while most dealers, bank traders, liquidity providers, etc benefitted from the credit/real estate/M&A LBO mania of the last 5 years, I can assure you we got the short-end of the stick as the latter got paid severance, hit the bid for deferred equity for cash, and the worst were the first to go and got the best termination deals. I didn't go to a HF, prop desk, or PE while all my friends from college paid the high, but now that the seat has value I shouldn't get paid because my human capital is a commodity. right

Secondly, the seat is as anti-cyclical as it gets. Liquidity premiums vary inversely with the state of the economy and markets. Ask any swap dealer how much their seat was worth in 2005 and how they went about making their budget while the credit muppets sold protection and LBO guys piled it on to buy equity and get paid 10% of end of year marks.

Third, while liquidity premiums are high, the best dealers still know how to run a position. Prop traders always want mid, but give an adroit dealer a trade at mid and most will find a way to make money out of it, much less a spread to cushion it.

Fifth, just because there are lots of people who would jump at any job doesn't diminish the job well done of many traders and bankers in 2008. There were many engineers and software designers who would have gone to work for ITT Tech's consulting team in 2002, but that doesn't diminish the job done by the people in place

Finally, more broadly for people not in I banking, I do think it's appropriate that some years will not pay bonuses for people who don't produce. But at the same time, banking and trading jobs are meritocratic and most of the comp is incentive-based bonus. Doctors, lawyers, accountants make the bulk of their comp in salary and can therefore amortize liabilities more easily and with much more clarity. The 75% of Americans who don't want bonuses, particularly professionals from other industries whose net worths have been crushed, will probably also be complaining next year when high end real estate and SF, Chi, NYC real estate get hit even worse.

Anonymous said...

Anon @ 4:14,

Great post (except fifth usually comes after fourth :P). I hope to join the bank trader community this year and have been self-debating many of the moral points you and others have made here. I agree that the vast, vast majority of bank employees got the short end of the stick and are taking it on the chin from public opinion just as hard as top management.

Anon @ 4:14, if you have the time, email me at temp7226 at gmail. I would very much appreciate any advice and insight you (or others) have to give for "the new guy".

Anonymous said...

One thing that I do not understand is that everybody forgets that almost everybody was enjoying the party .. That goes from Limo drivers to CEOs passing thru politicians , teachers , doctors , restaurants owners, etc ... Everybody ( or almost everybody) took advantage of the high leveraged , high stamina cycle that we lived thru .. So , in my opinion , it is time to pay for it ... Most of the taxpayers that are putting money in the "fixing"of the system are the one who benefitted the most from the financial orgy .. Including the government itself .. Poor people do not pay taxes , taxes are ultimately borne by 10% of the population and most of these taxes were paid on high salaries and profits inflated by the boom of gigantic leverage ...I agree that bonus should be much lower but this silly and populist talk about the sacred "taxpayer money" is starting to make me noxious ... I have my own controversial views on taxing ... I think that EVERYBODY should pay taxes .. Same bracket for everybody or my vote should be worthy 7 times more that someone in the lower bracket .. But this is a long and controversial story ... In brief , i think whjat is happening is natural .. It was not the first and will not be the last and this the only way that we learn .. " It is on the verge of the precipice that Humankind changes "... Everybody surfed this wave .. Cheers my dear friends ...

wcw said...

Anon4:14, if your human capital is not fungible, you can walk if underpaid, just like the rest of us. If it is fungible, you are a commodity and your employer, representing the best interests of shareholders, should squeeze you. This year, and every year.

Full disclosure: layoffs at my end, globally zero bonuses above a certain pay level. We remain very profitable. Whether this has anything to do with zeroing out bonuses for the whining classes is left as an exercise for the reader.

Anonymous said...

Cannot believe that FED cut to the bone now...

Mr. Simple Sense said...

MM and the rest--ok so fed just started dropping money from the helicoptor--my question is what do i want to have in my safe deposit box???????? already got guns and ammo under the bed

question 2 how long till sarKOZY starts screeming about putting up trade barriers--i seem to remember somthing about the great depression and beggar they buddy--well here we come 2008 style

Anonymous said...

wcw@7:31 - is it rational for someone to walk away from a capital markets job into the financial labor market at this moment, save the stars with decades of experience? Banks and funds are laying off +ve PV employees who've never lost money due to headcount pressures. The choice is not as black and white as you present it to be. I have no doubt that an unintended consequence of all this will be to push more of the most talented financiers and executives into managing private capital for rich people with swiss and cayman accounts, leaving the banks and public capital even more poorly run next time around.

anon@6:25 - good points, and the same people who pay no taxes and complain about the bailouts don't realize that a fractional reserve system is also a public good. Nothing is written as sacrosanct that banks can lend out a multiple of their deposits to free up credit.

Macro Man said...

Hey, I AM a taxpayer, and I still have a beef. I have this really naive, child-like belief that banks and, frankly, all financial companies, should be run as if they were partnerships. Capital should be allocated as if it were the partners' money at stake, not some anonymous shareholders'. Loans should be made and structures concocted on the basis of "will I get this money back?". And bonuses should be paid on the basis of "how much money did we make this year?" If the firm hasn't made any money, why exactly should there be a bonus pool?

And perhaps all the non-fungible star traders who are pissed off with derisory bonuses should consider a few years at a mid-sized real money shop. At such a place a few years ago, my trading generated a high eight figures' worth of dollar profit for the funds' investors. However, because these were mutual funds, there were no performance fees accrued. So my pay was set at a level that would make a sell-side flow trader with a similar dollar P/L beyond apoplectic...this year. Why didn't I get paid any more? Because there was no money with which to pay me.

So pardon me if I really, really, really struggle to sympathize with profitable sell-side traders who get "stiffed" this year. There were plenty of us in the same boat, even in the good times.

Dataman said...

MM - I am on your side.

Anon is obviously on the take. He and his ilk do not get it. Oversized egos and a sense of entitlement. They should NOT get their bonuses. I am not a banker and I don't live on your side of the pond. But I have a voice and I do intend to make myself heard to politicians at this end. The masses outnumber the bankers and we have the votes. That is just the way it is. This is war.

drchaos said...

I have no doubt that an unintended consequence of all this will be to push more of the most talented financiers and executives into managing private capital for rich people with swiss and cayman accounts, leaving the banks and public capital even more poorly run next time around.

And I see the unintended consequences of THAT being that many more tax-evading rich peple will get scammed out of their money in diabolically clever and stupid ways, the banks will be slower, more boring, more secure and less leveraged.

And the economy will do great.

Go ahead, make my day.

Anonymous said...

Considering that some of these nearly bankrupt institutions have built up bonus pools in the billions, slashing those pools to a bare minimum would make eminent sense. In this environment it could mean all the difference between survival and bankruptcy/nationalization.

Particularly in the United States it would seem foolish to pay out huge year-end bonuses when a new, presumably more hands-on, administration is taking over in Washington. Do they really want government-appointed board members in control of the companies?