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CommentP&M Notebook

P&M Notebook: Merry Christmas from James Gorman

Investment bank management teams aren’t known for their sentimentality, but even they wouldn’t be heartless enough to sack thousands of staff in the week before Christmas. Instead, Morgan Stanley decided to do it two weeks before.

Of course, Morgan Stanley is not the only one. Standard Chartered and Credit Suisse are junking whole business lines, Deutsche is winnowing out those whose faces don’t fit the new regime, and now Rabobank has announced 9000 job cuts. Royal Bank of Scotland cuts are still going, with two managing directors out of FIG DCM, and more cuts expected. It is, in short, pretty nasty out there.

Of course, it should have been done ages ago. The vast scale of cuts in the fourth quarter of 2015 reflects the half-heartedness of previous rounds, which might have trimmed the fat a little and settled some political scores, but didn’t really put a dent in the cost base. Bank management didn’t really want to change things. Fixed income had bad quarters, but it also had bring-the-house-down boom quarters.

The scale of this round of cuts is meaningfully different, though. It is a major, and permanent, shrinkage of the industry, and there are absolutely not enough jobs at up-and-coming firms or investment houses to absorb the flood of sales, trading and back-office job losses. That has to mean pressure on compensation – Deutsche chief executive John Cryan’s tough talk on bonuses would be unthinkable without the backdrop of savage cuts across the Street.

So let’s talk Morgan Stanley. The cuts are deep – perhaps 25% of the fixed income front office – but they are not supposed to remove capabilities. Businesses are not being shut down, even if the managing directors that built them are being asked to seek employment elsewhere. Credit is hit hardest, with senior traders in financials and sub-investment grade credit cut. Emerging markets has lost its business head, as GlobalCapital reported last week. FX and rates are far from immune, with traders in Treasuries and US MBS also on the list.

This approach makes it hard to work out what the plan is.  Other firms have done chunky redundancy rounds across the board, but most pick out certain businesses to exit, make everyone involved redundant, and leave one trader hanging around to wind up the book. Credit Suisse’s government bond business, Deutsche’s single name CDS, or Barclays in structured rates, for example. Morgan Stanley wants a “credibly-sized” business – Colm Kelleher, head of institutional securities, used that word in a memo to staff – but how credible is a business where most of the managing directors have gone?

It could be a signal that fixed income just doesn’t need to be as big or as clever as it used to be, or it could drop Morgan Stanley into an uncomfortable mid-ground, easily beaten by banks that kept their staff in place, but not so small that it saves appreciable sums of money.

The crucial tell will be how much balance sheet Morgan Stanley leaves in fixed income. If figures from analytics firm Coalition are to be believed, FICC is still the most productive division of an investment bank – more revenue per employee than equities or IBD. That calculation leaves out the cost of balance sheet, but maybe less employees running the same risk is a good model.

Deutsche’s model in fixed income still seems to be in flux – talk of “flow monsters” seems very 2013 – but this week brought some bad news, as Belgium dropped Deutsche from its primary dealer group, and the European Investment Bank dropped Deutsche from its sterling panel. Deutsche was keen to emphasise that it was still committed to the public sector business, pointing to the number of primary dealerships it still had.

But following Credit Suisse’s decision to pull out of primary dealerships, DMOs can’t be picky – and rival bankers were quick to put the boot in, saying that the only way you get dropped is if you’re not picking up your share in auctions.

UBS, of course, is the restructured bank par excellence, and it is the Swiss bank’s new head of debt capital markets that’s been drawing attention this week.

Amir Hoveyda, former DCM head at Merrill Lynch, then Bank of America Merrill Lynch, joined UBS in 2014, following former boss Andrea Orcel, the chief executive of UBS investment bank, to the revitalised firm.

At the time, he took on a job called “vice chairman of CCS”, which appeared to be a senior client role cutting across advisory, equity capital markets and debt capital markets. Having more top FIG people in place at UBS certainly didn’t hurt – it’s the biggest and best business at UBS in EMEA – but Hoveyda’s name was made as a debt banker. At some banks, the “chairman” role means something, at others, it’s just a way to get someone in the building.

Over at RBS, the surprise is more that there are still staff left to cut, after multiple punishing rounds of redundancies. This week saw two managing directors in FIG DCM placed at risk – Tim Skeet, head of covered bonds, and Anne Gebuhrer, head of FIG DCM for French and Benelux.

This helps to illustrate the strange state of the covered bond market – though volumes are holding up, the ECB is buying, and regulatory treatment is as good as it has ever been, the list of experienced covered bond bankers out of the market is long. Mauricio Noe, Richard Kemmish, Ted Lord, and Jez Walsh are just the first four that come to GlobalCapital’s mind. The market is increasingly being treated as a FIG subsidiary, not a distinctive rates-lite product, and it is being managed part time by FIG generalists.

Derry Hubbard’s decision to hit the bid at Danske, and Lorenz Altenburg getting picked up by CaixaBank, look like smart moves against this backdrop – both get to be head of syndicate, at banks which are expanding, but have modest, achievable ambitions.

For bankers with the right skills though, all is far from lost – former RBS head of UK corporate coverage Nick Bamber is joining Legal & General as head of private debt. L&G (like other major UK investors) has been keen to ramp up the private placement business, and that fits with Bamber’s background in the private markets – he ran US private placements for RBS, before taking over IG corporates and then western European DCM. He left the firm along with Richard Bartlett and Eric Capp when the solutions side of the business was merged with primary origination and taken over by Scott Satriano.

Even if the tumbleweed is drifting through trading floors, regulators are still busy. Last week’s highlights were the Basel Committee’s “standardised approach to credit risk” – pretty controversial when the first draft came out last year, as it proposed ditching those awful credit ratings in favour of “objective” metrics like loan-to-value or Ebitda.

GlobalCapital panned the idea at the time – it would encourage gaming of other measures, and add complexity and opacity without removing any of the problems of ratings – a view shared by many in the market. Basel has apparently listened.

Ratings will be allowed, but in a “non-mechanistic manner”, for lending to corporates and banks. This has to be more workable than the last proposal (though it falls short of the Dodd-Frank objective of purging the system of ratings) but does make one wonder what the purpose of the consultation is now supposed to be. Other tweaks include mortgage risk weights, which will now rely almost entirely on loan-to-value. The rules are likely to hurt the Dutch, commercial real estate lending, and buy-to-let mortgages.

Basel may not be done for the year yet. Last year, the first version of this paper came out in tandem with a proposal for a floor under standardised risk weights (affecting banks using internal models), but this year, only the tweaks to the standardised approach have surfaced so far, suggested an update to the internal models rules isn’t far away.

Worst-case scenario, it could be huge – rights-issue-for-every-major-bank huge, but GlobalCapital is calling it – the regulators are going to back down.

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