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People and Markets

Coben speaks out on bonus caps and life after capital markets


ECM veteran discusses opportunities away from the trading floor, the legacy of the financial crisis and how rule makers have misunderstood what makes investment banking risky

Craig Coben enjoyed a long, storied capital markets career beginning in the 1980s and culminating in his time as co-head of global markets at Bank of America, via stints in New York, London and Hong Kong.

An equity capital markets specialist, he was there for the Big Bang in the City in the 1980s, the first tech boom (and bust), and was working at Merril Lynch during the 2008 financial crisis, when Bank of America ended up taking it over.

Last year, he left the bank but he has not sat idle, recently joining SEDA Experts, where he acts as an expert witness in financial markets disputes. He has even turned his hand to journalism with a column in the Financial Times.

Coben spoke to GlobalCapital about the state of the global equity markets, how regulators should think about bankers' pay and career options those that leave the capital markets.

GlobalCapital: You went on quite a journey during your time in the industry. Can you give us an overview?

Craig Coben: I started off as a lawyer for Sullivan and Cromwell, where I was for three years. I left right at the end of 1996, and at the beginning of 1997 I joined Deutsche Bank. It was such an exciting period in the City. Investment banks were building out capacity and there was a lot of growth in capital markets activity and growing integration with Europe.

It was an extremely optimistic, dynamic place to work, so I stayed there for about eight years through a very strong period of growth. I stayed there right up until when the TMT bubble burst in 2001, and then it obviously became a much more challenging period.

This really marked a tonal shift in the way in which a lot of Europeans saw equity investment. They realised that it entailed risk and that growing risk aversion had really crept into the European markets. We were in the doldrums for several years.

It was a challenging period. We went through successive periods of reductions in headcount and the scope, size and lines of business really started changing. A lot of functions were now being centralised in London for cost reasons.

I left Deutsche in the middle of 2005 to join Merrill Lynch. I thought there were a lot of really interesting opportunities at the bank, and I really liked the team and the leadership. I also thought that American banks would have a competitive advantage through the cycle in the equity capital market space; there were just so many deals. It was a very different kind of experience, the strength of the equities platform was really impressive.

What was it like working for Merrill through 2008?

Obviously, we all went through what happened in 2008 but it actually came as a surprise to me at the time because Merrill Lynch was a tightly run ship. We weren't very aggressive on the risk side, and we were relatively conservative in our approach to deal selection and execution.

We obviously had no idea what was going on in the fixed income trading side of the business, but where I was working we had pretty substantial controls. It felt like we were more conservative than many of our peers, but it was obviously a different story elsewhere at the bank.

After Bank of America bought Merrill Lynch, we had to work through the integration, which went very smoothly. There were a lot of complementary facets between the two franchises, although there was a lot to work through after the crisis.

I stayed at BofA for another 13 years. I have lived through all sorts of different developments, a macroeconomic equity market, regulatory development, and certainly the business has changed over time in many ways. But in a lot of other ways it stayed the same. A lot of the ideas that we talked about with clients aren't that different from what we were talking about back in 2009.

The way we build books, the way we market a company, there's a remarkable degree of continuity over that period of time. To the extent there have been some differences, they're fairly evolutionary steps and fairly small changes.

Maybe nowadays you use more virtual roadshows as opposed to physical roadshows, but the presentation, book building, marketing processes — although slightly more abbreviated — documentation and disclosure are all mostly the same over time. So, although the capital markets has changed in some ways, in a lot of ways there has been a tremendous amount of continuity within that evolution.

You’ve worked in London, New York, and Hong Kong over your career. How do the three compare as capital markets hubs?  

The striking things is how similar they are. People in finance think in a surprisingly similar way across the different geographies. Even clients make many of the same assets across a different geography so there are cultural differences, of course, but substantively what's more striking is how much is similar rather than how much is different.

The US is such a big market that when you work with Americans it can feel sometimes like the international markets are an add-on or are peripheral. Whereas, in Europe people think on a pan- European basis, so you could be speaking to an Italian client about a transaction you did in in Portugal, or Ireland, and they will consider it relevant.

Similarly, that is not the case in many Asian markets. You wouldn’t speak to an Indian client about a transaction you've done in Japan, or to a Chinese client about a transaction you've done in Australia, it would come across as being off-topic.

Looking then to the US, the IPO market seems to be operating in a much healthier way to that in Europe, the UK or Asia. Why do you think that is?

Well, it is a singular, uniform market with a high GDP and unrivalled depth and breadth, and all the economies of scale that are associated with that. In Europe and Asia, the markets are much more fragmented, they don't have as high a GDP per capita, and they don't have the benefits of the scale that the US has because they aren't integrated. It is very complicated for these countries to be integrated, given that you're talking about different sovereign countries, even if in some cases there are political unions.

The other thing is that the equity culture in the US is much more pronounced than anywhere else in the world, the US has the philosophy that retail investors are much more active in the US than in most other countries, share ownership is much more widespread and that isn't something that you see in many other jurisdictions. It could be argued that Hong Kong has a robust equity culture, but in some ways it more extreme and driven by margin financing.

The two IPOs that were priced in Europe — Ionos and EuroGroup — this month didn’t go to plan. What do you think Europe can do to improve things?

In the UK, you need to encourage pension funds to hold risk assets, especially equity investments. The UK passed a series of reforms that effectively penalised pension funds for holding equity investments. Across much of Europe, the regulations strongly favour and benefit fixed income investment, especially sovereign bonds. The risk aversion that's embedded in the regulatory regime is something that prevents the European equity markets from really realising their full potential.

For me, one of the most frustrating aspects is that — starting in the late 1990s, maybe early 2000s — we had hopes of a Capital Markets Union within Europe, and all the opportunities that would arise from a bigger, deeper, more integrated market. Those haven't really materialised for political reasons and Europe remains fragmented. Having a whole patchwork of discrete equity markets is sub-optimal from liquidity, capital raising and governance standpoints.

You’ve been vocal about the removal of the bonus cap that was applied to bankers incomes in Europe. What do you think the issue with doing this is?

The bonus cap trigger prompted banks to increase fixed pay by a substantial amount through both higher salaries and the introduction of role-based allowances. Historically bankers had a low base salary relative to what other professionals similarly situated would make but had a very high percentage of variable compensation.

So in difficult years, banks could dial back the variable compensation in order to manage their costs. It created a very sharp incentive system for performance.

When you suddenly have very high floors, the concern is that, first of all you may dull the competitive fires that should be burning in the belly of every senior banker.

Second of all, and this is what the Bank of England says, you make it much more difficult to reduce your cost base in the event of a really poor market like 2022. It doesn't really help you. It actually creates more difficulties than anything.

What studies have shown, and anecdotal evidence supports, is that the cap has no effect on risk taking. What has affected risk taking is the capital rules, the Volcker rule, all the various different capital rules that were introduced after the financial crisis. But the bonus cap, which was introduced in 2014, has had no effect on systemic stability, but it has guaranteed a fairly high minimum income for senior bankers, which can't be the purpose.

For some bankers who had gotten used to it, it was nice having fixed pay. A lot of people in London got used to very high levels of a fixed pay, so the UK is probably going to remove the bonus cap, and banks right now are looking at how they can remove the allowances and bankers are not in a good position to argue in favour of keeping those allowances because it goes against the ethos of an investment banker, which is supposed to revolve around performance-driven compensation.

How does this tie in with bonus slashing this year?

I've heard stories of bankers who were paid zero bonus this year who likely would have gotten less if they didn't have these allowances and such high salaries. It meant that the banks couldn't cut their costs as much as they could, or they had to compensate people in a way they otherwise wouldn't have, in terms of sharing money, because there was a group of people who had locked in minimum amounts.

Removing the bonus cap is just one example of the many reforms that the UK can consider now that it has left the EU. Leaving the single market has been a blow to the City, adversely affecting its appeal and the amount of activity — there's no question in my mind.

But, if you're going to Brexit, then you have to look at some of these different regulations and make the changes that you think need to be made that most suit your own interests in the City. This is just one example of a change that the Prudential Regulation Authority and the Financial Conduct Authority are going to recommend.

A banker may wish to keep her or his allowances, but they can't really say anything. It's just awkward, because you're supposed to be all about penny for performance. A really high level of fixed pay runs against that.

It doesn’t mean you will be taking reckless risk — that misunderstands actually how risk is taken on at banks and what drives risk in the first place.

You recently started work as an expert witness for SEDA Experts, something we covered two weeks ago extensively. This is just one of many routes for people reaching the end of a career in the capital markets. How did you make this decision?  

When you when you leave an investment bank you still want to engage in intellectually rigorous work, with very smart professionals in projects with a lot at stake. That was the motivation behind my interest in joining SEDA. I wanted to work with a firm that specialises in financial services so I can leverage off the expertise I've built up over the years but apply it in a different context.

When I first retired, I was approached with a lot of ideas and projects. It is very important to take a step back, not accept the first thing that comes across your desk, and to really think about what your strengths are, and what you're interested in.

There are a lot of different paths, but to some degree it's up to you to carve out the opportunities. I'm still being approached with all sorts of ideas; I just want to be selective and make sure that they are suitable for me and in something that I can excel at.

In investment banking there are many high octane, high performance individuals. You want to do things well, and you want to do things to the highest standards.

And do you think there are sufficient options out there for people in your situation?

To some degree it's a function of economic growth and opportunities. There are actually a lot of options, both inside and outside of business. I have had a lot of different opportunities presented to me across the full range.

I've also joined the board of Fulham Palace Trust, which is a charity that runs a historical house in Fulham [in southwest London]; I have been writing the odd article; I have started a football fan podcast called Cottage Talk with some friends.

At my age and with my experience I have the luxury to be able to choose what I want to do and not just take the first thing that that's presented to me.

What made you decide to retire?

I’d been doing it a long time. In Hong Kong, I was separated from my family. When you get to be in your mid-50s, it is always a good time to think about what you want to do for the next 15-20 years. After Covid, and after the separation from my family, it was the opportune moment to take stock about what I wanted to do for the next few years.

Finally, what do you think was the seminal moment of your career?

I think the financial crisis was the seminal moment for a lot of bankers, myself included. Everyone is just much more skeptical about everything after the financial crisis. We saw some very well-respected institutions go under, or nearly go under without government support, and it forces you to question first principles.

We are 15 years later, but it still feels like yesterday, and it's still very much defines a lot of the ways in which I still look at things in the markets. A lot of the paradigms, a lot of what we learned 15 years ago has remained etched in our memory. We are still going through the full ramifications of that, and working through what happened in 2008.