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Morning Coffee: A dreadful cautionary tale for junior analysts who are out of their depth, and why investment bankers are taking pay cuts to move into private equity

What do junior analysts want?  Responsibility. The opportunity to make a difference.  Real work, on real clients.  Why are they not always given it?  Because of cases like this.  Transamerica Corp, the US asset manager, has agreed with the SEC that it will pay nearly a hundred million dollars to compensate investors for a suite of quantitative products it marketed.

The SEC judgement contains all the gory details.  They start with a junior analyst at Aegon USA Investment Management (Aegon NV of the Netherlands is Transmerica’s parent company).  He had recently gained an MBA but had no experience in portfolio management or financial modelling.  He was given the job of inventing some quantitative models for tactical asset allocation. Nobody was overseeing him, nobody was checking his work and he was never given any training or mentoring in the field.

But this wasn’t just a hypothetical blue-sky project of the sort that you might give to a bright trainee to see how much initiative they have and whether they find out anything interesting.  Transamerica was actually launching products based on these models, and doing so well in advance of any validation work to test whether their results could be relied on.  Three days after the launch, a “peer review” process found that there were several serious errors, including such things as investment weightings which didn’t add up to 100%.  These errors were corrected, but many more were not found until much later on. Those other mistakes extended to, “incorrect calculations, inconsistent formulas, and the use of whole numbers where percentages were intended (such as 1.77 instead of 1.77%)”.

In the meantime, the funds were marketed as being based on “Econometric Models” which “took emotion out of the process”.  The junior analyst was featured in marketing podcasts explaining how all the decisions were delegated to the model.  All the while, the senior managers at Aegon USA were completely unaware of what was going on. Confident in the analyst's abilities, they would regularly forward prospectuses that had been sent to them for approval with emails titled “Help”.  Even when the company finally realised that the models were unusable, they didn’t tell the investors about it.

The junior analyst here is, mercifully and justly, not named in the SEC judgement, although two senior managers who ought to have been supervising him are.  It’s not the junior’s fault – he was given one of the trickiest jobs in finance, with no support.  And the first drafts of everyone’s models are always chock full of silly mistakes like percentages not adding up, or missing decimal points.  That’s why good organisations employ the “four-eyes” principle, particularly when dealing with work that has been produced by inexperienced staff and which is going to be used for real-money applications.

We can’t even blame the anonymous modeler in this case for taking on a job he was manifestly not ready for.  It’s absolutely natural for everyone to want to stretch themselves, and to do real work.  The SEC has done the right thing in putting the blame squarely on the CIO and the new products executive. The lesson for ambitious young analysts in a hurry is that sometimes the reason that the boss keeps holding you back is that if you make a mistake and lose a hundred million dollars, it will be the boss’s name, not yours, on the eventual lawsuit.

It’s not just in fund management that juniors want to get stuck in, though.  It’s one of the most commonly cited reasons why investment banks tend to find their best associate-level staff get poached by private equity firms.  And more and more of them are making this move.  Analysis from the Options Group (a New York headhunter) suggests that banking-to-PE now accounts for one in three junior level job moves, up from one in five in 2015.  And this is despite the fact that the average pay is quite materially lower.  In the Options Group data set, the 2017 total comp was $180,000 for junior executives in private equity and $315,000 for senior ones, compared to $248,000 and $351,000 respectively in banking.

Part of the reason for the shift is still to do with the greater deal involvement and less pitch work on the buy side.  But it’s also notable that changes in compensation practices in the banking industry mean that the dollar figures are not completely like for like. Private equity carried interest is subject to less tax than income, and it gets paid in cash once the deal is closed.  It’s not held in restricted stock and not usually subject to clawbacks.

It’s also likely to be the case that people who move jobs don’t necessarily consider themselves to be average.  The highest end of the private equity profession can see wealth creation for people with partnership stakes that is well in excess of anything you can get on a salary and bonus deal.  Looks like the theme of today is ambition, and its dangers.


Employment lawyer John Singer appears to be building a franchise as the go-to attorney for prominent men accused of harassment. While he personally regards the #MeToo movement as “wonderful”, he also believes that “firms are shooting people without doing a fulsome investigation”.  When companies have chosen to act quickly in the fact of bad publicity, he has advised his clients to take legal action.  (WSJ)

In the UK, top bank analysts Jonathan Pierce and Tom Rayner are moving from Exane BNP Paribas to Numis, underlining the mid-cap specialist house’s determination to build a leading research product across sectors.  Numis sees the MiFID 2 research rules as an opportunity to hire leading names in the UK.  (Financial Times)

Lehman Brothers former staff are beginning to speak out in defence of their 10-year reunion (Irish Times)

A former Bank of America technology VP, who has his name on eight of BoA’s patents for innovations relating to blockchain technology, has said on Twitter that he believes the majority of those patents to be “worthless” (Cryptocurrency News)

The Deutsche Bank / Commerzbank deal rumours continue, with the FT’s Olaf Storbeck describing it as “when, not if”.  Nobody quoted in the story seems to be exactly enthusiastic about the transaction, which would require “radical” branch closures and redundancies, but according to one source, there is no structural or technical reason why the deal could not be done in three to six months. (Financial Times)

As the IPOs of several bitcoin-mining equipment manufacturers draw near, observers suggest that their performance will be a sign of market confidence or otherwise in the long term viability of Bitcoin. (Bloomberg)

Research shows that African-Americans are significantly more seriously affected by job loss, in mental health terms (Brookings)

Hanspeter Brunner, the former head of Asia at Banca della Svizzera Italia who got caught up in the 1MDB scandal, is back, working with his son at a due diligence startup (Finews)

Fashion advice for bankers from the former proprietor of the GSElevator twitter account.  The author does not approve of fleece vests, apparently. (Medium)

English Premier League footballers are paid in sterling, so they are in the market for hedges against the falling value of their wages post-Brexit (Financial Times)

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AUTHORDaniel Davies Insider Comment

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