The trading debacle at Societe Generale could give a boost to Wall Street's internal watchdogs, the risk and compliance professionals who populate back- and middle offices.
In a world of increasingly complex trading vehicles and demanding regulators, compensation, stature and headcounts within departments that oversee trading activity are already on the upswing. The latest events will likely accelerate the trend, even though SocGen's rogue trader constructed his phony futures positions from the simplest of instruments, says David Martin, Boston regional director at worldwide recruiting firm Michael Page International.
The Paris-based bank's $7 billion trading loss shines a spotlight on "operational risk" - the risk of losses caused by weaknesses in internal controls, supervision, information systems and other management functions. At some banks, the compliance department looks out for operational risk. At others, the responsibility sits within the audit department. Many banks are turning to Big Four accounting firms to examine their controls and suggest improvements.
"We've seen an increase in operational risk hiring over the last two to three years," says Martin. "I don't think that's going to slow down, and I think this will realistically encourage focus upon this department. Because this is frightening, this amount of money."
Management Takes Notice
What's more, he says, "SocGen is not sloppy. They have good people, they hire well." In Martin's view, that makes it even more likely that senior management at other banks will sit up and take notice. "There are people that will say, 'If it can happen to SocGen, it can happen to us.'"
(However, some highly placed bankers don't trust the official version of events. The New York Times quoted numerous bank leaders, regulators and academics expressing various degrees of disbelief the 31-year old junior trader acted alone.)
Monday's Financial Times reports bidding wars are already breaking out for risk managers at investment banks. The story cites London-based executive search firm GRS Group's finding that in the past three months, 44 percent of risk managers recruited away by another bank received a counter-offer from their current employer. That's more than twice the usual proportion, according to GRS. While the average counter-offer included a 10 percent - 12 percent bump in base salary, it was often sweetened with a bonus guarantee. In one case, a U.S. bank "bought back" an employee set to defect to a European bank by raising his total compensation from about 100,000 to a guaranteed 160,000 ($318,000 at the Dec. 31 exchange rate). "U.S. investment banks were twice as likely to make counter-offers than others, with European and Japanese banks taking a laissez-faire attitude to candidates who said they would jump ship," the FT says.
In the past decade, Martin has seen back- and middle office activities transformed from a "support function, to a policing and a control function." The trend, which began soon after the 1995 Barings Bank collapse sparked by a rogue trader's activities, has accelerated in the last five years. Gains in pay and prestige followed as a direct consequence of the shift from support to policing.
Narrowing Pay Gap Versus Front Office
"A compliance officer in 2000 was paid little more than someone doing settlements. A chief compliance officer now is an exceptionally well-paid job. We've seen an instance where someone tripled their salary in a matter of 18 months," says Martin. That particular case involved an individual whose responsibilities expanded rapidly as SEC regulation ballooned while more-senior colleagues were being hired away.
Professionals charged with controlling market risk are gaining ground, too. Such roles often require advanced quantitative degrees, and their compensation - while still below that of front-office traders - can reach well into seven figures.
"The big picture is that back- and middle-office functions are increasing in complexity, in need for very well-educated, bright people, rather than simple operational checkers," says Martin.
Although he declined to put a figure on risk managers' compensation growth, Martin's certain it's climbing faster than the average among Wall Street functions. As a result, since 2002, "There has been significant closing of the (pay) gap, especially between middle-office and front-office." That's another trend he expects will continue.