An employee at a global bank tells Joris that working in the City can challenge one's ability to be level-headed
• This monologue is part of a series in which people across the financial sector speak to Joris Luyendijk about their working lives
We are meeting for dinner in an Italian restaurant in the City. In his mid 40s and foreign-born, he comes across as level-headed and almost shy, given to little jokes about his weight before telling the waiter: "I know I should want the fruit salad. Now bring me the tiramisu."
"I have been involved in setting bonuses for a fair number of years. Basically, it's a bunch of guys in a room going over a list of names and accounts and saying 'OK, so how much do we give this guy?'.
"The first year I made a terrible mistake. I thought, I am going to fight for the people on my team to get what they deserve. Wrong. After I had settled on those numbers, senior management came in and cut all bonuses by 20%. Headquarters took off another 15%.
"The following year I added 40% over what I thought reasonable and that's how it played out. By cutting bonuses senior management proves to headquarters they have the bank's interests at heart (while probably leaving more for the top). Headquarters need to be seen by shareholders to be doing the same.
"Something happens to your brain after a big bonus. You think wow, so this is what I am worth. That term in itself is telling: 'worth'. During the boom I'd find handouts in my mailbox at home from real estate brokers: 'City bonus, don't know what to do with it?'.
"The first few years I got zero. Then it began to go up, at some point reaching double or triple my salary. Mind you, when the cycle turned it went straight back down. These days the trend is clearly down, and not only because of 2008. The trend in derivatives is clearly the other way. Yes, I know of people with seven-figure packages, though they love to keep this vague.
"The bonus culture is a ritual, on many levels. The bonus is paid in January but the pre-positioning starts in September–October. People fly their kite, signalling to their boss 'look how well I have done over the past year'; 'remember the account that went so well, I was on board'. When a big deal is announced, people try to get their names mentioned. We call that 'revenue tourism'.
"Meanwhile, management is pushing back: this year is not going to be the big one. The economy/our bank/department/desk … There's always one of them that hasn't done well and hence is 'a drag'. They are managing and talking down expectations.
"Then it's bonus or 'comp[ensation] day', the next part of the ritual. People are called into a room and told their 'number'. Many firms have glass corner offices, so everyone gets to see the spectacle. The idea is that you explode. Many colleagues will try to make management think they should have got far, far more. You see colleagues smashing their fist on the table, with the manager keeping a poker face and probably saying 'you know it's enough'. I remember one time when a female colleague, pretty high up, came out and her head was simply red. She had been 'donutted' [given zero bonus]. Taking a golf club that was lying around, she hit a paper waste bin as hard as she could. It smashed against a screen, emptying the contents over a completely shocked intern. Word has it that management eventually let her go over that. Was it the letter of the law, did they want to get rid of her anyway?
"It's theatrics. On the other hand, some are stupid enough to buy a house that's too expensive and send their children to an unaffordable private school. If you allow your family finances to become dependent on your bonus, and then the bonus doesn't materialise…
"When the bonus pool is very shallow some managers choose to 'almost-zero' everyone so they can pay one or two stars a lot. To assure continuity. Bonuses are said to motivate people, but then you are not supposed to know what your peers get. Revealing your bonus is absolutely taboo, yet most people have a rough sense of what others are getting.
"Almost all people my age in the City will have three or four company names on their CV. It's rather unusual never to hop between banks or financial firms. Looking back on the day I started, not a single person from that trading floor is still with the bank. Those 300 research analysts, traders and sales people… All have moved on, either made redundant or left on their own accord.
"I know it makes bankers look almost weird when they don't hop from bank to bank. It's like top people look at their CVs and go: what's wrong with this guy? When it comes to promotions, there is this bias in favour of getting an outsider. The idea is, this guy must have been passed over for promotions a few times, so giving him one now looks like we couldn't find anyone better.
"The sector suffers from pervasive human capital destruction. Someone new comes in and bang! He cuts headcount by 10%. Now, if the economy doesn't really move and he gets the remaining 90% to do all the work, then he looks smart. He has cut costs and kept revenue stable. But now the economy picks up and we're hopelessly understaffed. These are just one of the bets made by incoming managers to 'make an impact'. It's no way to run a business, but it's how many desks are run.
"For me, changing employers would be a sideways step, not a step up. I'd make more because that's how it works; you are lured away by a better offer. But what would I gain? I'd spend 18 months proving myself, working twice as hard, getting to know colleagues and build relationships with them.
"Let's talk about my job. Ten years ago at least 300 people in my bank were doing equities. Then, huddled away in the corner were the derivatives people, maybe 10 of them. What were they doing? Nobody really knew. Nobody cared. Ten years later it's us in that corner and derivatives dominating the trading floor. Equity salespeople and traders are a dying breed.
"When I started the trading floor had far more cohesion. Often several colleagues were dealing with one and the same client. If one of us fleeced him, all suffered. You knew and understood what everyone else was doing, and there was a great deal of solidarity. Our clients were limited in number: traditional asset managers, pension funds, insurers or private banks. Today there has been a proliferation of hedge funds – really a label for a wide range of outfits. With a relatively small number of clients your reputation is very important. Think of the difference between a restaurant catering to regular clients, and one in a tourist area.
"A second change is the explosion in the number and nature of financial products. Which brings me to complex derivatives. The culture of equity is so different from derivatives. We try to build relationships with clients who invest money in real companies, for the long term. Complex derivatives traders work with a far larger and diffuse pool of clients, who could decide at any point to switch from one product to the next.
"In equities you and your clients move with the economic cycle. Stay in the business long enough to pass through an entire economic cycle and by the end you will have done reasonably well for yourself. You accept there will be very meagre times. With complex derivatives it's very much about here and now, as you can make money in a market that's going down as well as up. There's no direct relationship with the economic cycle.
"My clients choose to deal with me for the quality of advice, the execution of their trades and the value of our research. With complex derivatives it's mostly driven by price. Often complex derivatives are not traded on an open exchange but over the counter [OTC] – in other words, it's an agreement directly between bank and client. One reason is that OTC derivatives are usually custom-made for the client, so there's only of them in the world.
"To illustrate how transparency in equity works, suppose a client places an order to buy a particular stock at careful discretion which is trading at 25. My trader goes into the market and executes it for 25.12. At the end of the day my client sees on his information terminal that the day's average price was 25.10. Did he overpay? He calls me and I go over to our trader. If it's really the trader's fault we might take the loss and give the client a better price. Otherwise we could lose our reputation and he will go elsewhere.
"Now, with OTC derivatives, how does a client find out he was disadvantaged? There's no exchange. Traders and clients base prices for OTC derivatives on a number of 'Greeks' – parameters indicating levels of volatility and other derivative characteristics of the product. It all comes down to client's ability to understand these Greeks' their sophistication. There is a huge difference between genuinely sophisticated clients and those eager to be seen as professional who actually don't grasp [all of] it.
"I have heard OTC derivatives traders use the term 'rape and pillage'. That means selling a less sophisticated client a financial product carrying a high likelihood of blowing up and causing that client never to deal with you again. A lot of regulation has come in to prevent this, but in some non-EU jurisdictions these can still be sold. Again, note the difference with equity. A client can lose money on my recommendations, but it is almost impossible to bring down the client.
"You could argue that OTC derivatives are among the best indicators of the degree of genuine reform in the financial sector. One reason the crisis of 2008 got so bad was that banks had these totally opaque derivatives on their books, so nobody knew who had what. Since then there's been a fight to improve transparency but banks resist with all their means. Transparency correlates inversely with profitability; it has always been like that.
"How could you regulate against the worst practices? Some small steps have been taken, but it just seems to require too many resources for a regulator. Parliamentary select committees might challenge bank CEOs on these products. Is the CEO aware of them? Can he guarantee they are fair? More importantly, does he really understand the systemic risks? That could make for good theatre.
"The actual work of equity sales: my bank has a network of hundreds of analysts worldwide. They follow the corporations listed on the stock exchanges in my region as well as macro-economic and political trends. I translate their research for my clients. Then if they want to increase their exposure to my region – increase their investment – I can help them decide which sector or country. I can help spot trends early on, and advise them on sudden developments. Say, a virus breaks out at a major cattle corporation; will this pass or [could it] take down the company? My clients speak to 10 or 15 banks each day, then form their own view.
"I also arrange trips to companies in my region. To travel halfway around the world with clients whom I have come to know really well over the years. To see countries and companies change … Can you see why I love my job?
"Incidentally, that is your chief asset in equity sales: the relationship with your clients. When you move employers, you take them with you so when a bank poaches you, they poach your clients.
"Working in the City gives a real buzz but it can seriously challenge one's sense of level-headedness. I have tremendously enjoyed it so far because of the relationships I have built and the things I have learned. It can be over from one day to the next. You receive a risk premium for that. Innovation and progress change the relative value of skills, in banking as in other professions. Today is my time; tomorrow, somebody else's."
     |
 |
| READ THE ORIGINAL POST AT www.guardian.co.uk |
