Levine on Wall Street: Allowances and Time-Outs
Bankers will get an allowance if they're good, or good-ish
Bankers and traders are paid in a mix of fixed and variable compensation that, at the senior levels, tends to skew heavily toward the variable. The variable compensation has acquired the unfortunate name "bonus," which causes non-bankers to get offended when it is greater than zero, particularly in bad years. (Bankers themselves see no reason why variable compensation should vary around zero.) Regulators in the European Union have led a charge to reduce the proportion of variable compensation in bankers' pay packages, limiting it to one to two times fixed compensation. Arithmetic being a harsh master, this means fixed compensation will go up, but banks are apparently addressing that problem by giving the increased fixed compensation a new and equally unfortunate name, "allowance." Do your chores, bankers, or you won't get your allowance. There's no possible way that could lead to public misunderstandings, is there? What seems to be missing is any clever effort to make the allowance replicate a discretionary bonus, for instance by paying it into escrow and clawing it back if the employee ends up having a bad year. It's just more base salary by another name: "Bank officials acknowledge that such maneuvering isn't ideal and gives them less discretion over their annual staff bills."
But currency traders who were bad are getting a time-out
We talked yesterday about the brewing foreign-exchange manipulation scandal, and meanwhile Citi and JPMorgan put some currency traders on leave for their involvement. "Regulators are focusing on an instant-message group the traders set up to share information about their positions and client orders over a period of at least three years, four people with knowledge of the probe said this month." That seems bad? My perhaps naive understanding of how market making works is that, yes, of course you make money off your customers, that's how you make a living, but they're your customers and you should basically treat them honestly. On the other hand, it's harder to make money off your competitor dealers, but also much more fair game: They're the enemy, they're competing with you on level terms, you should take them for whatever you can get. An IM group where you're open with other dealers about your positions -- making it harder for you to out-trade them -- and also open with them about your clients' orders -- making it easier for everyone to out-trade the clients -- seems downright unsporting.
Credit Suisse is getting its capital right
One of the hazards of bank capital regulation is that the rules change every year or two as regulators fine-tune exactly what they think should count as capital. Back in 2008 Credit Suisse issued a ton of Tier 1 Capital Notes, which under Swiss rules qualified as good capital then but don't now. So they called the Qatar Investment Authority, which held $4.5 billion of the Tier 1 Capital Notes, and exchanged them into the same amount of Tier 1 Buffer Capital Notes, which work under the new rules. The buffer notes are "contingent capital," or "cocos," which means that they convert to ordinary shares if Credit Suisse's common equity capital ratio falls below 7 percent, which is what the regulators like these days. (Weirdly, they seem to pay a lower coupon than the old capital notes - see page 167 here.) One possibly undervalued benefit of buying weird capital securities is that the issuing bank will probably need to restructure them every couple of years to comply with changing regulatory demands, so you can charge a bit for each restructuring. That is an advantage that is less available to common stockholders.
Someone will sue Bank of America over mortgages
This comes as some surprise as I had thought everyone had already sued Bank of America over mortgages but the supply is inexhaustible:
The staff of a United States attorney's office plans to recommend that the Justice Department sue Bank of America over the packaging and selling of mortgage-related investments before the financial crisis of 2008, the firm disclosed in a regulatory filing on Wednesday.
The rest of the article is mostly a list of other mortgage lawsuits and investigations that Bank of America was already facing, including the big Countrywide mortgage lawsuit that it lost just last week. You get a sense of why mortgage settlements are problematic for the likes of Bank of America and JPMorgan: No matter how many cases you close, it seems like there are always more lurking out there, so you can never get a moment's peace.
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Matthew S Levine at email@example.com