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Morning Coffee: Goldman Sachs traders’ big Q4 blowout, and Christian Sewing’s disappearing deferred bonus

Everyone knows that the trading results at Goldman Sachs haven’t been what they used to be of late.  But an analysis of the regulatory filings for the fourth quarter by Bloomberg suggests things at GS might’ve been worse than anyone knew. It turns out that Q4 wasn’t just a feeble quarter; it was one where a lot of the time, Goldman’s fixed income powerhouse was losing money.  There were 19 down days during the three month period, the worst performance since Q3 2011. And on one of those days, Goldman lost nearly $100m.

Is this really the end of the Goldman Sachs impregnability myth? It might be objected that over the long run, what matters is not so much the number of days you lose money, but how much you lost – and even more importantly, how much you made on the days when you were in profit.  But while there’s some validity to that as a trader’s proverb, it’s not an applicable excuse here.  Firstly, this just wasn’t a good quarter for Goldman’s fixed income, currencies and commodities (FICC) traders – they were 37% down on Q3 and 18% down on the same quarter last year.  And second, while a hedge fund portfolio might be able to compensate for a run of losers with a few big winners, a bank trading desk isn’t really meant to be acting that way; it ought to be managing its risks and generating steady flow profits.

This always used to be one of Goldman’s trademark strengths; bringing together risks across the whole FICC operation in the legendary SecDB database and managing them together.  But people have been saying for a while that SecDB was showing its age and halfway through last year, we noticed that GS was staffing up a new project called ION Engineering, aiming to build a new FICC risk management system “from the ground up”.

Was it a coincidence that just as ION started work, the loss-day count started to rise? Yes and no.  The thinking behind ION was that the new system would support a strategic move away from customised trades toward flow products and liquidity provision.  And you can’t be a liquidity provider to corporate clients unless you’re sometimes prepared to buy when the world is selling and take the consequences for daily volatility of doing so.  It could be that the Q4 performance reflects a transitional period when the risks are on the book, but the flow revenues haven’t fully kicked in.

Alternatively, it might be that some of the volatility is coming from the final C in FICC, the one that never really seems to belong in the same line as fixed-income and currencies.  There are plenty of news reports suggesting that David Solomon intends to make cuts to the commodities franchise, due to a run of weak profitability and heavy capital consumption.  Since commodities are often illiquid and subject to significant price swings, if they have had a tough quarter, they might have contributed disproportionately to the number of down days.  Whatever the reason, GS management will be hoping that it’s at least another seven years before they have a quarter like that again.

Elsewhere, a dramatic illustration of how bad things have got for Deutsche Bank comes with the remuneration report, which details not only top management compensation, but the vesting of long term plans.  Since Deutsche has had some plans in the past with quite long deferral periods, some of the awards this year reflect compensation decisions made in a very different world for the share price, and consequently have delivered numbers significantly lower than might have been anticipated at the time.

In 2014, for example, Christian Sewing was head of group audit, and was given a deferred bonus based on a share price in the mid 30s.  It paid out yesterday - €145,272 worth of Deutsche shares.  That’s not exactly a bad amount of money to have – it will get you a Mercedes G-Class if you don’t go crazy with the options, or ahalf case of Romanee Conti 1978 to accompany the Game of Thrones box set, but it’s not exactly life-changing and is a far cry from the half-million plus that might have reasonably been anticipated back in the good old days. Deutsche employees might at least be glad to see that the top man is sharing the pain.

Meanwhile ...

Nervous times, potentially, for Deutsche and Commerzbank top management as Handelsblatt reports that key investor Cerberus has come round to the idea of a merger of the two banks as the only way to solve their systems investment issues (Reuters)

In a weekend NYT longread, a Harvard Business School-educated journalist looks up his former classmates and asks them why they are all so miserable.  The secret appears to be that although well paid, they don’t really feel like they’re doing anything meaningful in their banking and consultancy jobs (NYT)

If you’ve got the money, though, there’s now a podcast to help you with Seven Principles for spending it (Bilal Hafeez)

A former JPM and Citi investment banker has gone back to university and come out as the inventor of a low energy seismic system that he believes is the key to extending the life of North Sea oil and gas reserves (Energy Voice)

If Goldman Sachs is serious about breaking into mid-market IBD deals, it will need to hire less “snobby” bankers (FT)

The revelations which led to charges of industrial espionage against Huawei’s CFO originally came from discoveries made by HSBC in its internal inquiries after a US sanctions-busting settlement (Reuters)

With the promotion of Lara Warner to CRO, Lydie Hudson to chief compliance officer and Antoinette Poschung to head of HR, Credit Suisse now has 25% female representation on its executive board... (Financial News)

... and a ripple effect of promotions at the level immediately below have given more prominent roles to the head of regulatory affairs and the “CEO-whisperer” investor relations head (Finews)

Despite Brexit, fintechs in the UK continue to grow and attract investment (Quartz)

And Man Group intends to become (as part of its social impact fund product) a registered social landlord (Inside Housing)


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AUTHORDaniel Davies Insider Comment

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