Two unrelated major events late last week could significantly affect Wall Street career prospects. A sharp downturn in trading volume that depressed banks' profits last quarter is a potential downer for jobs later in 2010. On the other hand, Goldman Sachs's settlement of civil fraud charges with the SEC is a potential positive influence.
Poor second-quarter results from JPMorgan, Bank of America and Citigroup reflect a broad trend: trading volume dived last quarter, whether you look at fixed-income, derivatives or equities. In Europe, for instance, Financial News reports activity on stock exchanges fell 20 percent in London and 47 percent at Deutsche Börse in June compared with May, while derivatives exchanges saw falls of around 40 percent. And the underlying causes - heightened risk aversion tied to ongoing market volatility, European sovereign debt fears and new regulatory initiatives in both Europe and the U.S. - show little sign of abating.
To be sure, bank managements are putting on a brave face. JPMorgan says it's not about to slow an ongoing hiring binge that added 1,300 people or 5 percent to its investment banking division headcount during the second quarter. Bank of America Chief Executive Brian Moynihan says he looks at trading as a quarter-by-quarter business and sees no need to scale back staff after last quarter's downturn.
Maybe those bank CEOs know something we don't. Or, maybe they believe they're looking ahead but are really looking in the rearview mirror - hewing to an aggressive strategy and staffing levels better suited to past quarters' more buoyant trading conditions, with little more than intertia to back up their optimism. If last quarter's pace proves to be the new normal, then the robust hiring that's occurred over the past 12 months will be unsustainable - indeed, might have to be reversed later this year through job reductions. Even in the best-case scenario, poor trading results look to compress bonus pools.
Ending of SEC-Goldman Lawsuit Is Good For Whole Industry
The settlement of the SEC's civil fraud lawsuit against Goldman Sachs marks a classic win-win outcome. Not only for Goldman and the SEC, but for the entire industry - its structured finance segment most of all.
That Goldman and its work force (past and present mortgage and credit derivatives participants especially) dodged a bullet by settling the case seems beyond doubt. The important question is, what does the conclusion augur for careers elsewhere on Wall Street? From where I stand, it appears positive not just for Goldman, but for other banks too.
For starters, the relatively modest $550 million penalty imposed on the industry's biggest, richest, most vilified player gives an early read on the maximum downside risk any institution might face for selling tranched deals that went awry in the crisis. If the SEC intends to go after the many similarly crafted deals out there, they had every reason to open the bidding with their strongest suit. So if last Thursday's result establishes a template for future civil settlements, it must represent an upper bound on any one issuer's liability. It might also militate against criminal prosecution of Goldman or other banks, since the adoption of language analyst Brad Hintz called an admission of "negligence, not fraud" could mean the SEC had a weak legal case. Past and present structured products salesmen at Deutsche Bank, JPMorgan, UBS and the other institutions involved in the so-called Magnetar trade (which allegedly involved practices similar to Goldman's Abacus) must be relieved about that.
Most of all, the settlement draws a disclosure road map banks can follow to stay out of trouble in future deals. And that route is fairly simple to follow. It therefore removes a substantial new source of regulatory risk that could have blocked a revival of innovative deals for a long time to come. Although sub-prime is dead and other exotic credit deals remain rare today, financial innovation will return in one form or another. And so will demand for professionals who structure, sell and trade tranched securities that allocate default and other risks among groups of investors.