Today: 9 May 2012
Euro Falls as Greek Leaders Struggle to Form Coalition.
The euro fell, extending its longest losing streak in 3 1/2 years, as Greek politicians struggle to form a new government, raising concern that the nation may leave the currency bloc.
The 17-nation euro traded 0.2 percent from an almost three-month low versus the yen before Alexis Tsipras of Greece’s Syriza party is due to meet today with leaders of New Democracy and Pasok, the two parties that supported austerity measures.Australia’s dollar fell after Prime Minister Julia Gillard said returning a budget surplus gives the central bank “maximum room” to move on interest rates. Demand for the U.S. currency and yen was buoyed as Asian stocks dropped.
“If Greece exits the euro bloc, it will be their own decision, which may come if we see the change of leaders there,” said Thomas Averill, managing director in Sydney at Rochford Capital, a currency and interest-rate risk-management company. “Euro is going to be under pressure for some time.”
The euro slid 0.2 percent to $1.2975 at 6:47 a.m. in London from yesterday’s close in New York. It touched $1.2955 on May 7, the weakest level since Jan. 25. The seven-day slump through yesterday was the longest stretch of declines since September 2008. The common currency lost 0.4 percent to 103.44 yen, after falling to 103.24 on May 7, the lowest since Feb. 16. Japan’s currency bought 79.72 per dollar from 79.87.
Averill expects the euro to drop to $1.26 by the end of this month.
Global Stock Declines
The MSCI Asia Pacific Index of stocks retreated 1.2 percent. The Standard & Poor’s 500 Index (SPX) lost 0.4 percent yesterday, while the MSCI World Index slid 0.8 percent.
Tsipras, whose Syriza party placed second in Greek elections on May 6, said he would forge ahead with plans to form a coalition government of left-wing parties after he was handed the mandate by President Karolos Papoulias.
Antonis Samaras of New Democracy and Evangelos Venizelos, the former finance minister who leads Pasok, rejected an ultimatum from Tsipras to send a letter to the European Union revoking their written pledges to implement austerity measures by the time he meets them today. Another election may be held in mid-June if politicians fail to form a governing coalition.
Greece could exit the euro bloc as soon as next month, according to John Taylor, founder and chief executive officer of hedge fund FX Concepts LLC in New York.
‘Out of Money’
“This summer, I think, is very likely,” Taylor said in an interview with Erik Schatzker and Sara Eisen on Bloomberg Television’s “InsideTrack” yesterday. “The Europeans aren’t going to give them the money, the International Monetary Fundisn’t going to give them an OK. They’ll be out of money in June.”
The euro has weakened 3.6 percent over the past six months, the worst performance of the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar rose 1.1 percent, and the yen dropped 1.6 percent.
Investors should sell the euro at $1.3075, targeting $1.2850 with a stop-loss order at $1.3165, UBS AG said, citing trading patterns. A stop loss is a preset instruction to exit a trade at a certain level in case a bet goes the wrong way.
The euro may fall to the January low of $1.2628 should the currency break below the 62 percent retracement of the January-to-March advance at $1.2954, Richard Adcock, head of fixed-income technical strategy in London, wrote in a note yesterday.
‘Sluggish’ Global Economy
The greenback and yen gained against most of their major peers today as concern that a recovery in the global economy is losing momentum bolstered demand for safer assets.
Exports from Germany, Europe’s biggest economy, probably decreased 0.5 percent in March from the previous month, when they rose 1.5 percent, according to the median forecast of economists in a Bloomberg News survey before the statistics office releases the figures today. U.S. initial jobless claims may have risen by 4,000 to 369,000 in the week ended May 5 from the prior period, another poll showed ahead of tomorrow’s data.
“The whole global economy is sluggish and we expect that to remain the case,” said Rochford’s Averill. “I think there is still some short-term gain for safe-haven currencies” such as the dollar and yen.
The so-called Aussie fell for a second day versus its U.S. counterpart after Gillard said the budget for the fiscal year starting July 1 supports the Reserve Bank of Australia when it moves on interest rates.
With growth in the nation returning to trend it was the right time to end four years of fiscal deficits, Gillard said in an interview in Canberra today after delivering a A$1.54 billion ($1.55 billion) surplus forecast for 2012-13.
“What we can do as a government is to get fiscal policy in the right shape to give the Reserve Bank the maximum room to move should they choose to do so,” Gillard said.
Australia’s dollar weakened 0.5 percent to $1.0067 after touching $1.0053, the least since Dec. 29.
Traders moving to Hedge Funds.
In the five years that John Silvetz made about $700 million for Deutsche Bank AG by trading corporate bonds and credit derivatives, the share of his annual bonus paid in cash dropped to 20 percent from almost 70 percent.
The rest, earned by betting on companies from American International Group Inc. to MBIA Inc., was locked up in deferred stock and euros, according to people familiar with the matter, who asked not to be identified because they aren't authorized to discuss compensation. In September, Silvetz, 37, jumped to hedge fund BlueCrest Capital Management LLP. He was the last of a trio of New York debt traders who departed after making $1 billion for the German lender in two years, the people said.
Wall Street’s biggest banks have lost almost two dozen of their most-profitable credit traders in the past 13 months as regulators limit the kind of risk-taking that amplified the housing crisis four years ago. As banks slash or defer pay and reduce the amount they’re willing to wager, the traders are seeing better opportunities at hedge funds and investment firms that seek to profit in markets lenders are retreating from.
“People who were contributing quite a bit to the overall profitability of the firms are forced to move on,” said Doug Shaener, managing partner at Quest Group, a New York-based executive search consulting firm that specializes in financial services. “You’re seeing individuals looking to go to places where they obviously aren’t as regulated, where they don’t have as many restrictions in terms of their trading.”
Responding to Pressure
More than three years after bad bets on housing led to the collapse of Lehman Brothers Holdings Inc. and emergency sales of Bear Stearns Cos. and Merrill Lynch & Co., lenders are responding to toughened capital rules that damp risk-taking and make trades costlier.
In the U.S., the so-called Volcker rule, the provision in the 2010 Dodd-Frank Act named for former Federal Reserve Chairman Paul Volcker, will set limits on risk-taking by depositories with government backing.
Traders are fleeing cash bonuses that were capped last year at 65,000 pounds ($105,000) at U.K. lender Barclays Plc, 100,000 euros ($131,000) at Frankfurt-based Deutsche Bank and $125,000 at Morgan Stanley in New York, according to data compiled by Bloomberg. For some at Charlotte, North Carolina-based Bank of America Corp., cash bonuses were limited to $150,000.
‘Buyer’s Market’
Hedge funds are offering managing director-level traders salaries of about $200,000 to $250,000, said Michael Karp, managing partner at New York executive recruiter Options Group. Some of the largest hedge funds may pay bonuses of as much as 12 percent of traders’ profits, or an even bigger percentage of their earnings after the firm takes a 2 percent cut, according to Options Group.
Unlike the banks, the funds typically pay 50 percent or more of bonuses to their highest earners in cash, according to New York-based compensation consulting firm Johnson Associates Inc. The rest may be locked up in funds the firms manage.
“It’s a buyer’s market” for the hedge funds, Karp said. “People are figuring out how to trade in this new world.”
Silvetz’s departure from Deutsche Bank followed those of Prakash Narayanan and Thomas Curran, who together made more than $1 billion for Germany’s biggest bank in 2009 and 2010, the people with direct knowledge of the situation said. Silvetz, Narayanan and Curran declined to comment.
Barclays Departures
Brian Maggio left Barclays’s credit-trading team in New York in March for Millennium Management LLC, a hedge fund with $15.6 billion invested. In the five years ended in December, the trader made an estimated $375 million for Barclays and Lehman, where he worked until the firm filed for bankruptcy in September 2008, according to two people familiar with the matter. Maggio’s exit followed those of Barclays colleagues Jason Quinn and Peter Agnes, both of whom went to Caxton Associates LP in New York.
Maggio and Quinn declined to comment. Agnes, who didn’t respond to messages left on his mobile phone, was part of a proprietary-trading group dealing in credit markets that wouldn’t be allowed under the Volcker rule and has been shut down, according to a person familiar with the matter.
Barclays is among banks including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley that have shut proprietary-trading groups.
Goldman Sachs credit traders Matthew Knopman and Philip Ha left the New York firm earlier this year, with Knopman starting at Anchorage Capital Group LLC this month and Ha going to MKP Capital Management LLC, people familiar with the moves said in March. Rob Jackson joined Cyrus Capital Partners LP from Goldman Sachs in February.
TCW Hire
High-yield bond trader Jerry Cudzil departed Morgan Stanley to head U.S. credit trading at TCW Group Inc., which was managing $73.3 billion in fixed-income assets as of March 31. Peter Viles, a spokesman for Los Angeles-based TCW, confirmed the hire.
BlueCrest this month added Deutsche Bank credit trader Stefano Galiani, according to three people familiar with the matter. It brought on Morgan Stanley’s Eugene Gokhvat in April, according to BlueCrest spokesman Ed Orlebar, who said he couldn’t comment about Galiani.
Representatives of Deutsche Bank, Barclays, Goldman Sachs, Morgan Stanley and Bank of America declined to comment.
“Many of the major investment banks just don’t have the capital they used to, and a lot of that is because of the Volcker rule,” Marc Lasry, co-founder of Avenue Capital Group LLC, said May 2 in an interview with Bloomberg TV’s Stephanie Ruhle at the Milken Institute Global Conference.
‘Very Different Business’
Regulations limiting banks’ proprietary trading “has been great” for his New York-based hedge fund, he said. “Nobody’s really competing with you as much as they used to.”
Unlike equities, fixed-income trades typically are privately negotiated outside exchanges, increasing the fees traders collect by making bids and offers because they’re more difficult to execute.
To make markets in debt securities, banks typically risk their own capital to buy assets from clients before lining up someone else to sell them to, sometimes making bets on the direction of markets. The new rules are curbing that, turning traders more into middlemen.
“It’s turning into a very different business than it once was,” John Reed, head of credit trading at Kohlberg, Kravis Roberts and Co. in San Francisco, said in a telephone interview.
Reed joined the private-equity firm in 2008 from Bear Stearns, the investment bank that sold itself to JPMorgan that year to avoid collapse.
Implementing Volcker
“The banks have reduced capital allocation to trading desks and cut back traders’ ability to take risk,” he said.
The 21 primary dealers that trade directly with the Fed have cut holdings of corporate debt due in more than a year to the lowest level in almost a decade. Inventories soared to as high as $235 billion in October 2007, before dropping to as low as $40.4 billion on Feb. 22, Bloomberg data show.
Revenue from trading among the nine-largest U.S. and European investment banks, excluding accounting gains, dropped 16 percent to $120 billion in 2011 amid the escalating European sovereign-debt crisis, Bloomberg data show.
“Trading had a very poor year on Wall Street, so bonuses were down and so many people were cheaper than they would have been a year or two ago,” Johnson said. “We probably have not reached equilibrium yet because I don’t think anybody knows quite how the Dodd-Frank and the Volcker rules and all that, how that’s really going to shake out.”
Lenders will have two years to implement the Volcker rule as long as they make a “good faith” effort to comply with the ban on proprietary trading, U.S. regulators said April 19.
Dimon Lobbies
The Volcker rule “matters more” in credit markets “because transactions are typically over-the-counter,” said Roger Joseph, co-chair of financial services at law firm Bingham McCutchen LLP.
Chief executives from JPMorgan, Goldman Sachs and Bank of America -- three of the five biggest U.S. banks by assets -- lobbied the Fed on May 2 to soften proposed reforms that might crimp their profits, saying that new rules would harm financial markets.
JPMorgan Chief Executive Officer Jamie Dimon sent a 38-page letter to shareholders last month, saying that while he agrees with the Volcker rule’s intent to eliminate “pure” proprietary trading and ensure market-making won’t jeopardize banks, the rule must be written so that it doesn’t put U.S. banks at a global disadvantage.
“We cannot and should not be in a position where the rule affects U.S. banks outside the United States but not our foreign competition,” Dimon, 56, wrote.
London Whale
Along with its competitors, JPMorgan has shut groups in its investment bank that specialized in speculative bets with the company’s own money. At the same time, the bank has kept some of its biggest risk-takers in its chief investment office, with a team that has amassed as much as $200 billion in investments, booking a profit of $5 billion in 2010 alone, a former senior executive, who asked not to be identified because he wasn’t authorized to discuss the matter, said last month.
Bruno Iksil, a London-based trader for the group dubbed by some in the market as the London Whale, gained attention this year after moving credit derivatives with trades so large they distorted price relationships, market participants who asked not to be identified said last month.
Financial institutions also are adapting to higher capital requirements set by the Bank for International Settlements in Basel, Switzerland, and a slowdown in the global economy being fueled by Europe’s sovereign-debt crisis. Banks reduced employment by more than 120,000 worldwide last year, Bloomberg data show.
Eroded Volumes
While traders have historically headed for hedge funds with the hope of bigger paydays, Wall Street banks previously offered greater job security and a higher volume of business. That’s changed, said Gregory Cresci, an executive recruiter at Odyssey Search Partners in New York.
“A lot of these guys were sitting atop a mountain of trading volume and revenue, much of which has eroded beneath them,” he said. “So it’s logical that they decide to leave or are no longer needed.”
Silvetz, who joined Deutsche Bank in 2001, generated about $225 million in profit for the firm in 2009 with trades that included wagers American International Group, the insurer rescued by the U.S. government in 2008, was in better financial condition than its bonds suggested, according to people familiar with the situation who declined to comment because they weren’t authorized to discuss the trades.
MBIA Trades
Silvetz also accurately predicted credit-default swaps protecting against a default by bond insurer MBIA would plunge.
Before Silvetz’s departure last year, Narayanan and Curran left Deutsche Bank for hedge funds Saba Capital Management LP and Rose Grove Capital Management LLC. Narayanan had been with Deutsche Bank since 2002, and Curran was an employee since 2004, Financial Industry Regulatory Authority records show.
Deutsche Bank, which during the credit crisis reported $22.6 billion in losses and writedowns that were less than rivals including Bank of America and Morgan Stanley, saw the departures this year of Scott Martin and C.J. Lanktree, who traded distressed debt. They started working at Solus Alternative Asset Management.
Neil Yaris, who headed high-yield sales and trading at Bank of America, left in February for Luxor Capital Group LP, the New York-based hedge fund run by Christian Leone.
Jefferies Hires
Bank of America, which recorded $115.5 billion of writedowns and losses in the credit crisis, cut pay by 25 percent on average last year, Bloomberg data show.
Smaller investment banks not touched by the Volcker rule are also adding credit traders from the biggest institutions.
Jefferies Group Inc., the New York-based securities firm led by Chairman and Chief Executive Office Richard Handler, hired at least seven corporate debt traders, including Tim Sullivan from UBS AG, Richard Roche and David Murphy from Morgan Stanley, and Sean George from Deutsche Bank. In April, it hired credit trader Ji Pak from JPMorgan, Finra records show.
The best-performing traders are landing hedge-fund jobs even as the industry is in its fourth year of underperforming stocks. Funds returned an average 3.4 percent this year through April, Bloomberg data show, compared with a 12 percent return from the Standard & Poor’s 500 Index.
No ‘Buffalo’ Migration
Investors still poured $16 billion in new capital into hedge funds during the first quarter, boosting assets to a record high of $2.13 trillion, according to Hedge Fund Research Inc., a Chicago-based research firm. Relative-value hedge funds that focus on fixed-income markets received a net $12.4 billion, the most of any strategy.
“Hedge funds don’t employ that many people. So I think the migration is not the wild buffalo across the prairie or something,” Johnson said.
Financial firms boosted base salaries starting in 2009 as they de-emphasized bonuses, which lawmakers said encouraged bigger-than-average risks that fueled the financial crisis and still make up the bulk of pay packages.
Employees at the largest investment banks got an average salary increase of 3 percent last year, compared with 14 percent at smaller investment banks and 13 percent at fund managers, according to an online survey of 2,860 financial professionals by eFinancialCareers.com.
‘Talented Traders’
When year-end bonuses were included, average pay in 2012 fell for workers at companies including Goldman Sachs and JPMorgan’s investment bank. As bonuses dropped, some banks raised base salaries that in past years contributed a small portion of pay for senior employees.
“They’re talented traders, they contributed a lot to the overall performance of the firms, but it’s a changing world,” Quest Group’s Shaener said, referring generally to traders being hired by asset managers.
“In some cases they want to move on, and in some cases it’s not necessarily an option because their roles and the businesses they were part of are no longer what the firm is looking to invest in,” Shaener said.