In the five years that John Silvetz made about $700 million for Deutsche Bank AG by trading corporate bonds and credit derivatives, the share of his annual bonus paid in cash dropped to 20 percent from almost 70 percent.
The rest, earned by betting on companies from American International Group Inc. to MBIA Inc., was locked up in deferred stock and euros, according to people familiar with the matter, who asked not to be identified because they aren't authorized to discuss compensation. In September, Silvetz, 37, jumped to hedge fund BlueCrest Capital Management LLP. He was the last of a trio of New York debt traders who departed after making $1 billion for the German lender in two years, the people said.
Wall Street’s biggest banks have lost almost two dozen of their most-profitable credit traders in the past 13 months as regulators limit the kind of risk-taking that amplified the housing crisis four years ago. As banks slash or defer pay and reduce the amount they’re willing to wager, the traders are seeing better opportunities at hedge funds and investment firms that seek to profit in markets lenders are retreating from.
“People who were contributing quite a bit to the overall profitability of the firms are forced to move on,” said Doug Shaener, managing partner at Quest Group, a New York-based executive search consulting firm that specializes in financial services. “You’re seeing individuals looking to go to places where they obviously aren’t as regulated, where they don’t have as many restrictions in terms of their trading.”
Responding to Pressure
More than three years after bad bets on housing led to the collapse of Lehman Brothers Holdings Inc. and emergency sales of Bear Stearns Cos. and Merrill Lynch & Co., lenders are responding to toughened capital rules that damp risk-taking and make trades costlier.
In the U.S., the so-called Volcker rule, the provision in the 2010 Dodd-Frank Act named for former Federal Reserve Chairman Paul Volcker, will set limits on risk-taking by depositories with government backing.
Traders are fleeing cash bonuses that were capped last year at 65,000 pounds ($105,000) at U.K. lender Barclays Plc, 100,000 euros ($131,000) at Frankfurt-based Deutsche Bank and $125,000 at Morgan Stanley in New York, according to data compiled by Bloomberg. For some at Charlotte, North Carolina-based Bank of America Corp., cash bonuses were limited to $150,000.
Hedge funds are offering managing director-level traders salaries of about $200,000 to $250,000, said Michael Karp, managing partner at New York executive recruiter Options Group. Some of the largest hedge funds may pay bonuses of as much as 12 percent of traders’ profits, or an even bigger percentage of their earnings after the firm takes a 2 percent cut, according to Options Group.
Unlike the banks, the funds typically pay 50 percent or more of bonuses to their highest earners in cash, according to New York-based compensation consulting firm Johnson Associates Inc. The rest may be locked up in funds the firms manage.
“It’s a buyer’s market” for the hedge funds, Karp said. “People are figuring out how to trade in this new world.”
Silvetz’s departure from Deutsche Bank followed those of Prakash Narayanan and Thomas Curran, who together made more than $1 billion for Germany’s biggest bank in 2009 and 2010, the people with direct knowledge of the situation said. Silvetz, Narayanan and Curran declined to comment.
Brian Maggio left Barclays’s credit-trading team in New York in March for Millennium Management LLC, a hedge fund with $15.6 billion invested. In the five years ended in December, the trader made an estimated $375 million for Barclays and Lehman, where he worked until the firm filed for bankruptcy in September 2008, according to two people familiar with the matter. Maggio’s exit followed those of Barclays colleagues Jason Quinn and Peter Agnes, both of whom went to Caxton Associates LP in New York.
Maggio and Quinn declined to comment. Agnes, who didn’t respond to messages left on his mobile phone, was part of a proprietary-trading group dealing in credit markets that wouldn’t be allowed under the Volcker rule and has been shut down, according to a person familiar with the matter.
Barclays is among banks including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley that have shut proprietary-trading groups.
Goldman Sachs credit traders Matthew Knopman and Philip Ha left the New York firm earlier this year, with Knopman starting at Anchorage Capital Group LLC this month and Ha going to MKP Capital Management LLC, people familiar with the moves said in March. Rob Jackson joined Cyrus Capital Partners LP from Goldman Sachs in February.
High-yield bond trader Jerry Cudzil departed Morgan Stanley to head U.S. credit trading at TCW Group Inc., which was managing $73.3 billion in fixed-income assets as of March 31. Peter Viles, a spokesman for Los Angeles-based TCW, confirmed the hire.
BlueCrest this month added Deutsche Bank credit trader Stefano Galiani, according to three people familiar with the matter. It brought on Morgan Stanley’s Eugene Gokhvat in April, according to BlueCrest spokesman Ed Orlebar, who said he couldn’t comment about Galiani.
Representatives of Deutsche Bank, Barclays, Goldman Sachs, Morgan Stanley and Bank of America declined to comment.
“Many of the major investment banks just don’t have the capital they used to, and a lot of that is because of the Volcker rule,” Marc Lasry, co-founder of Avenue Capital Group LLC, said May 2 in an interview with Bloomberg TV’s Stephanie Ruhle at the Milken Institute Global Conference.
‘Very Different Business’
Regulations limiting banks’ proprietary trading “has been great” for his New York-based hedge fund, he said. “Nobody’s really competing with you as much as they used to.”
Unlike equities, fixed-income trades typically are privately negotiated outside exchanges, increasing the fees traders collect by making bids and offers because they’re more difficult to execute.
To make markets in debt securities, banks typically risk their own capital to buy assets from clients before lining up someone else to sell them to, sometimes making bets on the direction of markets. The new rules are curbing that, turning traders more into middlemen.
“It’s turning into a very different business than it once was,” John Reed, head of credit trading at Kohlberg, Kravis Roberts and Co. in San Francisco, said in a telephone interview.
Reed joined the private-equity firm in 2008 from Bear Stearns, the investment bank that sold itself to JPMorgan that year to avoid collapse.
“The banks have reduced capital allocation to trading desks and cut back traders’ ability to take risk,” he said.
The 21 primary dealers that trade directly with the Fed have cut holdings of corporate debt due in more than a year to the lowest level in almost a decade. Inventories soared to as high as $235 billion in October 2007, before dropping to as low as $40.4 billion on Feb. 22, Bloomberg data show.
Revenue from trading among the nine-largest U.S. and European investment banks, excluding accounting gains, dropped 16 percent to $120 billion in 2011 amid the escalating European sovereign-debt crisis, Bloomberg data show.
“Trading had a very poor year on Wall Street, so bonuses were down and so many people were cheaper than they would have been a year or two ago,” Johnson said. “We probably have not reached equilibrium yet because I don’t think anybody knows quite how the Dodd-Frank and the Volcker rules and all that, how that’s really going to shake out.”
Lenders will have two years to implement the Volcker rule as long as they make a “good faith” effort to comply with the ban on proprietary trading, U.S. regulators said April 19.
The Volcker rule “matters more” in credit markets “because transactions are typically over-the-counter,” said Roger Joseph, co-chair of financial services at law firm Bingham McCutchen LLP.
Chief executives from JPMorgan, Goldman Sachs and Bank of America -- three of the five biggest U.S. banks by assets -- lobbied the Fed on May 2 to soften proposed reforms that might crimp their profits, saying that new rules would harm financial markets.
JPMorgan Chief Executive Officer Jamie Dimon sent a 38-page letter to shareholders last month, saying that while he agrees with the Volcker rule’s intent to eliminate “pure” proprietary trading and ensure market-making won’t jeopardize banks, the rule must be written so that it doesn’t put U.S. banks at a global disadvantage.
“We cannot and should not be in a position where the rule affects U.S. banks outside the United States but not our foreign competition,” Dimon, 56, wrote.
Along with its competitors, JPMorgan has shut groups in its investment bank that specialized in speculative bets with the company’s own money. At the same time, the bank has kept some of its biggest risk-takers in its chief investment office, with a team that has amassed as much as $200 billion in investments, booking a profit of $5 billion in 2010 alone, a former senior executive, who asked not to be identified because he wasn’t authorized to discuss the matter, said last month.
Bruno Iksil, a London-based trader for the group dubbed by some in the market as the London Whale, gained attention this year after moving credit derivatives with trades so large they distorted price relationships, market participants who asked not to be identified said last month.
Financial institutions also are adapting to higher capital requirements set by the Bank for International Settlements in Basel, Switzerland, and a slowdown in the global economy being fueled by Europe’s sovereign-debt crisis. Banks reduced employment by more than 120,000 worldwide last year, Bloomberg data show.
While traders have historically headed for hedge funds with the hope of bigger paydays, Wall Street banks previously offered greater job security and a higher volume of business. That’s changed, said Gregory Cresci, an executive recruiter at Odyssey Search Partners in New York.
“A lot of these guys were sitting atop a mountain of trading volume and revenue, much of which has eroded beneath them,” he said. “So it’s logical that they decide to leave or are no longer needed.”
Silvetz, who joined Deutsche Bank in 2001, generated about $225 million in profit for the firm in 2009 with trades that included wagers American International Group, the insurer rescued by the U.S. government in 2008, was in better financial condition than its bonds suggested, according to people familiar with the situation who declined to comment because they weren’t authorized to discuss the trades.
Silvetz also accurately predicted credit-default swaps protecting against a default by bond insurer MBIA would plunge.
Before Silvetz’s departure last year, Narayanan and Curran left Deutsche Bank for hedge funds Saba Capital Management LP and Rose Grove Capital Management LLC. Narayanan had been with Deutsche Bank since 2002, and Curran was an employee since 2004, Financial Industry Regulatory Authority records show.
Deutsche Bank, which during the credit crisis reported $22.6 billion in losses and writedowns that were less than rivals including Bank of America and Morgan Stanley, saw the departures this year of Scott Martin and C.J. Lanktree, who traded distressed debt. They started working at Solus Alternative Asset Management.
Neil Yaris, who headed high-yield sales and trading at Bank of America, left in February for Luxor Capital Group LP, the New York-based hedge fund run by Christian Leone.
Bank of America, which recorded $115.5 billion of writedowns and losses in the credit crisis, cut pay by 25 percent on average last year, Bloomberg data show.
Smaller investment banks not touched by the Volcker rule are also adding credit traders from the biggest institutions.
Jefferies Group Inc., the New York-based securities firm led by Chairman and Chief Executive Office Richard Handler, hired at least seven corporate debt traders, including Tim Sullivan from UBS AG, Richard Roche and David Murphy from Morgan Stanley, and Sean George from Deutsche Bank. In April, it hired credit trader Ji Pak from JPMorgan, Finra records show.
The best-performing traders are landing hedge-fund jobs even as the industry is in its fourth year of underperforming stocks. Funds returned an average 3.4 percent this year through April, Bloomberg data show, compared with a 12 percent return from the Standard & Poor’s 500 Index.
No ‘Buffalo’ Migration
Investors still poured $16 billion in new capital into hedge funds during the first quarter, boosting assets to a record high of $2.13 trillion, according to Hedge Fund Research Inc., a Chicago-based research firm. Relative-value hedge funds that focus on fixed-income markets received a net $12.4 billion, the most of any strategy.
“Hedge funds don’t employ that many people. So I think the migration is not the wild buffalo across the prairie or something,” Johnson said.
Financial firms boosted base salaries starting in 2009 as they de-emphasized bonuses, which lawmakers said encouraged bigger-than-average risks that fueled the financial crisis and still make up the bulk of pay packages.
Employees at the largest investment banks got an average salary increase of 3 percent last year, compared with 14 percent at smaller investment banks and 13 percent at fund managers, according to an online survey of 2,860 financial professionals by eFinancialCareers.com.
When year-end bonuses were included, average pay in 2012 fell for workers at companies including Goldman Sachs and JPMorgan’s investment bank. As bonuses dropped, some banks raised base salaries that in past years contributed a small portion of pay for senior employees.
“They’re talented traders, they contributed a lot to the overall performance of the firms, but it’s a changing world,” Quest Group’s Shaener said, referring generally to traders being hired by asset managers.
“In some cases they want to move on, and in some cases it’s not necessarily an option because their roles and the businesses they were part of are no longer what the firm is looking to invest in,” Shaener said.