Morning Coffee: Morgan Stanley MD warns juniors - it’s a grinder job. Bank of America delights in higher trading revenues after hiring, again

With Labor Day receding into the recent past, the financial markets are now beginning to fill with the signs of autumn – the sight of turning leaves, the smell of pumpkin spice and the sound of young graduates saying “I just don’t feel like I’m putting my degree to use”.  Although many investment banks try to emphasise the intellectual challenge and innovative problem-solving aspects of the job, the reality, according to Mike Wilson, the chief equity strategist at Morgan Stanley, is somewhat more prosaic.  As he puts it in a recent podcast interview:

“Not so fun. I mean, you know, it, you’re learning, but it’s, you know, it, it’s an entry level job and it’s not glamorous. You’re, you’re punching the clock pretty heavy hours […] This is not a sexy business. Okay? This is, this is a grinder business. So if you come into this business, understand, like we talked earlier, you’re gonna be wrong a lot. You gotta have some humility.”

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In fairness to Wilson, he tries to make it sound a bit less bleak than this implies; at other points in the interview, he says that “boy, you’re surrounded by some really smart people and you’re, you’re working on things that are, are forcing you to grow intellectually” and “You are gonna be a lot of highs and lows when things are feeling really good”.  But the bottom line is that “you gotta put 10 years in before you know anything … we’re all ball eyed coming outta college thinking we’re gonna change the world. And the reality is, this is a, this is a long road”.

Unfortunately, this fundamental truth about a career in banking tends to be a crushing disappointment to sensitive people.  

The trouble is that all the things that young bankers find distressing – the relative unimportance of technical skills, the rapid progess made by mediocre charmers and the endless, thankless grind – are all facets of an even more fundamental truth about the banking industry, which is that it’s a team sport.

In fact, it’s even more of a team sport than soccer or baseball, because there’s just no way on a trading floor that a super talented rookie can come in and light things up with a breathtaking solo performance.  Everything is much too complicated and fast moving, so everyone is valued not for their own qualities, but for their contribution to the whole. Which means that, for the first decade at least, what matters is to be someone who puts their hours in, pays attention and doesn’t make mistakes, and who is at least bearable to spend time with. Sorry to be the bearer of bad news, kids.

Elsewhere, there’s an interesting contrast between Bank of America’s comments on the current quarter’s results and those from other banks like JPMorgan.  While its peers have been talking about continued growth in investment banking fees but a tough environment in trading, BoA seems to have had the opposite experience; fees are set to be flat in a quarter when “The mix of transactions is not as favorable to us”, but when trading revenues are continuing to grow in “low single digits” compared to a very strong base for comparison last year, and should be flat on Q2.

What’s the secret sauce? Neither more nor less than the fact that Bank of America has grown its revenues by hiring people; according to CEO Brian Moynihan, “strongly reflecting investments we made a few years ago in capabilities across fixed income, and building back the equities business”.  Nomura has seen a similar effect and is now expecting to be ahead of its targets.

It turns out that if you set high expectations, hire good people and generally act like trading is a core part of the business rather than a vaguely embarrassing distraction from “high quality” revenues, you get results.  Perhaps this industry isn’t really so complicated after all.

Meanwhile …

Performance standards just got a little more difficult in the hedge fund industry.  ExodusPoint is the latest big multistrategy fund to agree (after pressure from investors and in exchange for a longer lock-up period) that its performance fees will be subject to a hurdle rate, so the managers can only collect once they have beaten the return on three month Treasuries. (WSJ)

But investors in big hedge funds still have things to worry about – some of them are concerned that the top managers are paying too much attention to politics during the election campaign. (Business Insider)

The laws on “unexplained wealth” are themselves hard to explain.  Zamira Hajiyeva, the wife of an Azerbaijani banker who retired in 2015 citing “health concerns” and then went to jail with the court citing embezzlement concerns, will be losing her Knightsbridge mansion and the golf club she used to own, but apparently her jewellery collection is explained. (Standard)

But the laws on money laundering in Sweden are much easier to understand.  In a rare example of prosecutions affecting the top executives rather than mid-level managers, a former CEO of Swedbank has been sentenced to 15 months for historic failings in its Estonian operations. (FT)

Goldman Sachs’ expedition into consumer finance continues to be a source of annoyance and embarrassment – it now turns out that so far from bringing superior Wall Street skills to the credit card market, one of the portfolios they originated is likely to be sold at a discount due to “lax underwriting standards”. (WSJ)

Dan Pinto “could do it tomorrow”, Troy Rohrbaugh and Jenn Piepszak are in the mix, but don’t rule out Marianne Lake or Mary Erdoes.  Jamie Dimon says that he’s spending more time on the succession issue, but that there’s a lot of good internal choices. (Reuters)

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