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Morning Coffee: Why "highly talented bankers" have to be highly paid, and the most laid back office at JP Morgan

It isn’t the most fashionable view.

The Barclays trial continues to be a fascinating window into the things that bankers thought ten years ago but mainly try not to say in public any more as they have worked out it makes them unpopular.  Former Chairman Marcus Agius, for example, was testifying yesterday about the board’s discussions leading up to the Qatar investment, as Barclays was deciding whether to pull out all the stops to avoid taking UK government money.

Back then, there was a “fantastic level of competition” for bankers, said Agius. Barclays was “facing a problem, that if we didn’t pay people the going market rate … very highly paid, highly talented people walked out”.  The board was worried that “if our major shareholder was the government, our ability to pay our people competitive rates in order to obtain their services would be compromised”.

You can practically hear the booing and hissing from the gallery, as the general public get reminded that as well as driving an industry into the ground, requiring billions of taxpayers’ money and triggering a massive global recession, the hated bankers wanted a bonus for doing it.  But ... with the perspective of ten years, hasn’t the Barclays board deliberations of the time been proved kind of right?

Post the crisis, the big difference between the U.S. and European investment banking sectors has been that Europe has had compensation caps. And this hasn’t just been of theoretical importance; consistently, U.S. banks have paid more, and specifically paid bigger bonuses, than their European counterparts.  Coincidental (or not) with this, the U.S. banks have pulled away and gained huge market share.  Back in 2008 when Barclays was worrying about losing top talent, there were several European players who could hold their heads up high in the global top ten, and a few – Deutsche, the Swiss and Barclays itself were all up there – with genuine bulge bracket status.  Nowadays, not so much.  Although Barclays has paid out to some big hitters, the talent overall has drained away.

Of course the aim of the Europeans in capping bonuses was to reduce risk taking and prevent a recurrence of the crisis.  So, if you compare Deutsche, Commerzbank, SocGen and Barclays to Goldman, JPM, Citi and Morgan Stanley, which sector feels like it’s riskier?  Over the ten year period in question, the U.S. banks have had two major blow-ups of the sort the bonus caps were meant to prevent – the JPM “London Whale” and the Wells Fargo phony accounts scandal.  Europe has had fiasco after fiasco, repeatedly setting and then breaking new records for regulatory fines.

The experiment is surely over by now.  It was a good theory, that changing the incentives would change behaviour and result in safer and more boring banks, but it hasn’t worked.  It seems, instead, to have left banks that are less profitable, less compliant and where big intentional risk taking has been replaced by constant dumb mistakes.  Could it be that Barclays were on the right track all those years ago?

Separately, it’s not all about money, maybe.  For some people, mainly in IT rather than trading to be sure, lifestyle matters, and getting a really good latte while you grow your beard is worth more than earning a fortune in the Big Apple.  That’s what JP Morgan found when it started setting up a cloud computing system and started to try to hire engineers away from Amazon Web Services, Microsoft Azure and Google Cloud, all of whom are based in and around 'laid-back' Seattle.  Presumably they weren’t paying peanuts in the first place given where they were hiring from, but location was a deal breaker for many employees.

And so, JP Morgan’s cloud computing cybersecurity hub is also going to be in Seattle.  A few blocks from Pike’s Place Market, an easy dress code and they’re staffing up; 50 software engineers are working there already, with plans to hire another fifty.  Apparently the other main locations considered were Dublin and Hyderabad, so we might see other banks looking there if they choose to follow suit.

Meanwhile ...

Eight equity advisory bankers have been put at risk at SocGen, as the restructuring program begins to kick off (Financial News)

The super secret hedge fund with exceptionally strong performance ... the “McKinsey Investment Office”, managing the money of partners of the consulting firm, has done very well but doesn’t want to talk about it or take outside money. Obvious questions are raised about conflicts of interest, although apparently the majority of the assets are managed by third party hedge funds (New York Times)

Chapeau to the HSBC currency desk – in an otherwise slightly disappointing set of results, they reported that the bank had made a $120m single-day gain last year, as the Turkish lira devalued.  It was big enough to actually throw out the volatility estimate in their risk management models. (Bloomberg)

Perhaps some of the traders who delivered that day were among the 181 individuals earning more than £1.5m ($1.7m) at HSBC last year, up 8% on the previous year (Financial News)

Ken Hitchner, head of APAC, is the latest senior retirement at Goldman Sachs (FT)

Unhappy investors in Mithril Capital, the late stage VC firm founded by Peter Thiel, where the senior partner apparently has a “book ordering problem” and the planned move from Silicon Valley to Austin, Texas is not going down well with employees (Recode)

After a tough year’s investment performance, David Einhorn summarised some of Greenlight Capital’s most unfortunate investments in a presentation full of themed New Yorker cartoons (Business Insider)

State Street are suing the artist who made the “Fearless Girl” statue for selling versions of the plucky youngster to other customers; they thought they had the exclusive rights (Boston Business Journal)

And the question that basically killed all productivity on financial Twitter; who would win in a fight between Mike Tyson and a silverback gorilla? (Daily Mirror)

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AUTHORDaniel Davies Insider Comment

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