Thirteen years after Credit Suisse Group AG crowned itself Wall Street’s new junk-bond king by buying Donaldson Lufkin & Jenrette Inc., the last vestiges of its reign in the most lucrative credit business are being squeezed out by post-crisis banking regulations.
At least six senior members of the firm’s U.S. credit team have departed its New York office this year as top pay for high-yield debt traders and salespeople fell to about $3.5 million in 2012 from as much as $5 million three years earlier, according to two people with knowledge of the matter. The bank has scrapped monthly commissions it had paid as part of efforts to retain a DLJ junk-bond team led by an associate of Michael Milken, who created the market in the 1980s, the people said.
The exits underscore how regulations worldwide from bank capital standards to the U.S. Dodd-Frank Act’s Volcker rule are prompting Wall Street to cut compensation for corporate-debt traders who were among the biggest risk-takers before the market turmoil leading to the financial crisis that started in 2007. The traders are poised to earn 8.3 percent less in 2013 than they did seven years ago, with a vice president-level salary declining to an average $366,000 from $400,000, according to New York recruitment firm Options Group.
“Rules and regulations are killing this business,” said Michael Maloney, president of New York-based headhunter Maloney Inc. “The new Dodd-Frank rules and regulations and everything that’s happening in the industry are forcing banks to re-address compensation and risk profiles.”
These should be good times for debt traders as central banks pump unprecedented amounts of money into the financial system, pushing investors to snap up riskier assets and stoking $18.2 trillion of corporate-bond issuance worldwide since 2008.
Instead, bond dealers are jettisoning assets and shrinking credit teams to comply with rules issued in 2010 by the Basel Committee on Banking Supervision and the Dodd-Frank Act passed by Congress the same year.
Under the Basel standards, lenders need to reduce assets -- tallied according to the level of risk each carries -- by at least 25 percent and cut compensation pools at fixed-income, currencies and commodities units by more than 20 percent, according to estimates by Sanford C. Bernstein & Co.
This week, U.S. regulators adopted the final version of the Volcker rule, which restricts the kinds of trading that can be done at banks holding taxpayer-insured deposits. Regulators granted a broader exemption for banks’ market-making businesses, on the condition that traders aren’t paid in a way that rewards proprietary trading.
“You’re telling investment banks to get out of the business,” said Scott Colyer, chief executive officer of Monument, Colorado-based Advisors Asset Management, which oversees about $11.6 billion. “The capital isn’t there.”
Goldman Sachs Group Inc., which among big U.S. banks gets the largest portion of its revenue from trading, climbed yesterday to the highest level in almost three months after five agencies passed the Volcker rule in a form that avoided Wall Street banks’ worst fears.
Five years after the collapse of Lehman Brothers Holdings Inc. triggered the worst financial crisis since the Great Depression and prompted banks worldwide to cut more than half a million jobs, Wall Street firms are poised to reduce bonuses for their debt units by 15 percent or more this year, according to a Nov. 6 report from Johnson Associates Inc. That compares with an average increase of 5 percent to 10 percent for all employees, the New York-based executive-search firm said in the report.
At asset managers that have been buying debt at an unprecedented pace, compensation is poised to rise.
Debt-focused money managers at hedge funds are expected to earn an average $1.12 million this year, up from $1.04 million in 2012 and $780,000 the year before, according to a report by Johnson Associates and Stamford, Connecticut-based research firm Greenwich Associates that tracks fourth-quarter compensation trends.
Other banks that traditionally haven’t dominated debt trading also are stepping up their efforts to take advantage of the pullback by larger rivals, including Royal Bank of Canada, Birmingham, Alabama-based Sterne, Agee & Leach Inc. and St. Louis-based Stifel Financial Corp.
Johnson Associates predicts that pay will be higher at banks based in the U.S. than those headquartered in Europe, which are facing greater political and regulatory pressure and steeper declines in debt-trading revenue.
UBS to RBS
UBS AG, Switzerland’s biggest bank, announced 10,000 job cuts last year and a decision to exit most debt-related businesses at its investment bank. Deutsche Bank AG, Germany’s biggest lender, combined its North American investment-grade credit and interest-rates units in 2012 as it emphasizes electronic trading, which is capturing a bigger share of credit transactions globally than ever before.
Royal Bank of Scotland Group Plc, shrinking in response to calls from lawmakers and regulators to bolster capital, began cutting 2,000 investment-banking jobs in June. Two months later, Anthony Britton, one of the architects of RBS’s credit platform in Stamford, departed as head of investment-grade sales in the Americas.
Credit Suisse is seeing the departures of some of the last members of a high-yield debt team once run by Milken protégé Bennett Goodman. The group included Craig Packer, who now leads Goldman Sachs’s U.S. leveraged finance unit in New York, and Tripp Smith and Doug Ostrover, who helped Goodman found credit-investment firm GSO Capital Partners LP in 2005 before it was bought by Blackstone Group LP three years later.
In remarks to his leveraged-finance group before departing in 2005, Goodman, who started his career at Drexel Burnham Lambert Inc. in the 1980s when Milken was pioneering the use of speculative-grade bonds in buyouts, compared the Credit Suisse group to the New York Yankees, the team with Major League Baseball’s highest payroll and 27 world championships, according to a person with direct knowledge of the matter. Goodman declined through an assistant to comment.
In addition to a $1.3 billion retention package for DLJ executives after the 2000 acquisition, Credit Suisse agreed to pay monthly commissions to members of a leveraged-finance team to keep them from defecting to HSBC Holdings Plc, the people with knowledge of the matter said. Some of those payments, compensation that Maloney said is rare for banks that typically pay traders salaries and annual bonuses, continued into this year, the people said.
Drew Benson, a spokesman for Credit Suisse in New York, declined to comment on the bank’s compensation or the departures.
Steve Oplinger, who helped run high-yield sales at Credit Suisse after starting at DLJ in 1985, departed in January amid a disagreement over his group’s compensation, people familiar with the matter said at the time. He’s now head of U.S. junk-debt trading and sales at Royal Bank of Canada’s capital markets unit in New York.
Phil DeSantis, a member of the DLJ high-yield group who became the Zurich-based bank’s co-head of global credit products, departed in March after 13 years at the firm, according to an internal memo signed by Gael de Boissard, co-head of Credit Suisse’s investment bank. DeSantis is now president at Candlewood Investment Group LP, the $2 billion credit hedge-fund manager spun out of the Swiss lender.
Jed Kelly, co-head of syndicated loan sales, also resigned in March. Three other members of the bank’s junk-debt sales team -- Catherine Duffy, who started at DLJ in 1984, Douglas Kepple, who joined in 2001, and Diane Wright, who started in 2002, left during the past six months, according to Financial Industry Regulatory Authority records and people with knowledge of the moves. Wright plans to join RBC, the people said.
Last month, Credit Suisse reported the lowest quarterly fixed-income trading income since the end of 2011. Revenue in the three months ended Sept. 30 fell 42 percent from a year earlier to 833 million Swiss francs ($894 million), according to data compiled by Bloomberg. The revenue accounted for 6.05 percent of the $14.8 billion generated by the bank and its peers trading in fixed income, currencies and commodities markets, the lowest share for a third quarter since 2011 and down from 10 percent in the period in 2009, Bloomberg Industries data show.
The bank, which managed an unprecedented 20 percent of junk-bond issuance globally in 2000, the year it purchased DLJ for $13.4 billion, is winning less than 7 percent this year and has fallen out of the top-five underwriters for the first time since 1999, Bloomberg data show. That compares with 10.4 percent for No. 1 JPMorgan Chase & Co. Credit Suisse lost its top spot in junk-bond underwriting in 2004.
A decade ago, when the corporate-bond market included less than half of the $9.6 trillion of notes outstanding today in the Bank of America Merrill Lynch Global Corporate & High Yield Index, the biggest banks had a firmer grip over a business that’s still largely conducted over the phone and in private messages.
JPMorgan and Bank of America Corp., the second-most active underwriter, captured about 27.6 percent of the volume trading corporate bonds, leveraged loans, distressed debt and structured credit in 2012, according to investor surveys conducted by Greenwich Associates. That’s down from 30.8 percent for the top two firms in 2010.
“Market share has decreased across the board in the credit business,” Options Group Chief Executive Officer Michael Karp said in a telephone interview. “Leverage is not the same in credit as it was pre-crisis.”
Credit Suisse is slipping as speculative-grade offerings surged this year to a record $504.8 billion globally. Both underwriters and credit traders typically earn more by managing offerings and brokering trades of junk debt. The difference in what dealers charge to buy and sell dollar-denominated high-yield bonds has averaged 55 basis points, or 0.55 percentage point, since the end of 2006, almost three times as much as the 19 basis-point spread for investment-grade securities, according to Barclays Plc data.
While both European and U.S. banks must adopt the Basel committee’s stricter leverage and capital guidelines by 2019, regulators in some jurisdictions are requiring a quicker adoption of the standards, with European Union and U.K. banks required to be in compliance by Jan. 1. U.S. banks also are benefiting from the belt-tightening their regulators required to prevent another collapse like the failure of Lehman in 2008.
“It seems like it’s harder to be a European bank competing in this space than an American bank,” said James Borger, a principal at Greenwich Associates who focuses on fixed-income and foreign-exchange securities and trading. For credit traders at the biggest banks, compensation expectations “have been ratcheted down considerably over the past few years.”
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