Morning Coffee: When naïve traders agree to informal bonus formulae. BofA’s big junior hiring won’t benefit interns
Whatever you do, don’t join a bank promising formulaic bonuses without getting that promise in writing. This is the lesson from Andrew Brogden and Robert Reid, the former head and deputy head of the structured equity derivatives desk at Investec.
Brogden and Reid joined Investec in 2007, lured by the promise that their team’s bonuses would be calculated based upon, ‘economic value added’ and ‘institutional market rate,’ rather than the finger-in-air model favoured by most banks. Economic value added is usually calculated based upon net operating profit minus the cost of capital. ‘Institutional market rate’ seems to refer to the amount other banks paid their equity derivatives traders.
To begin with, everything went very well indeed. In 2008, Brogden and Reid earned £6.2m and £3.8m respectively (not bad for a ‘third tier’ South African bank). In 2009, they earned £1.45m and £1.4m. And in 2010 they earned £3m and £2.25m.
It was in 2011 that the two traders came unstuck. Suddenly, the million-pound-bonus spigot was turned off. Neither Brogden nor Reid got seven figure bonuses. Instead, Investec allocated them a mere £150k and £100k.
Investec says Brogden and Reid accepted the reduced payments at the time. With hindsight, however, they’ve decided that their diminished 2011 bonuses weren’t acceptable after all. The two men are suing the South Africa bank for £6.76m in total.
Needless to say, Investec is arguing that it owes them nothing at all. The South African bank says Brogden and Reid were paid according to the bank’s standard ‘net profits and losses’ method of determining bonuses, and that in 2011 their results weren't as good as expected. Even more unfortunately, neither Brogden nor Reid has evidence of their alternative and more favourable bonus formula in writing. “There is not even a single piece of paper that sets down how it is to be done,” said the judge, noting that Brogden and Reid’s failure to secure their payment terms was, “breathtaking.”
Separately, one year on from the death of Bank of America IBD intern Moritz Erhardt, it seems that BofA is trying to make junior bankers’ lives easier by hiring a lot more of them. The Financial Times has seen a memo from Christian Meissner, head of global corporate and investment banking at BofA, which says that the bank has hiked graduate and MBA hiring by 40%, partly to offer its junior bankers more support and a “better experience.”
All things being equal, this should mean that individual BofA analysts and interns will have to work less hard. However, the pick-up in the M&A market means there is more work for juniors to do and may partially offset the increased headcount . BofA’s big hiring plans also won’t make it any easier for this year's summer’s interns to convert their internships into full time job offers – the New York Times reports that intern numbers are already up 40% on last year. BofA clearly planned this a long way in advance.
Fixed income sales and trading revenues were expected to fall 20-25% last quarter. Instead, they fell by 10% at Goldman Sachs, 15% at JPMorgan and 12% at Citigroup. (Financial Times)
Goldman's private equity business had an excellent quarter. It's M&A business should have an excellent quarter soon. (Financial Times)
Goldman shares rose 1.7% yesterday. (MoneyMorning)
Goldman Sachs always benefits from improved macroeconomic activity. (Street Insider)
Jefferies just hired Peter Reilly from Deutsche Bank to establish a new capital goods research team in Europe. (Financial News)
Markham Rae, a hedge fund set up in 2010 by former BlueCrest Capital Management risk chief Jonathan Martin, just recruited two former BlueCrest staff as partners. (Financial News)
EY is recruiting advsory professionals and just hired Blaise Girard, previously head of retail investment banking in Europe at Bank of America. (Financial News)
Why idiots succeed. (Stumbling and Mumbling)
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