Morning Coffee: The bonus cap probably won't survive in Europe, either. A chance to go through some billionaires’ bathrooms

If you want to understand the banking industry over the long term, one of the most important principles to learn is that of the “regulatory pendulum”.  Things come and go, every action has an eventual reaction.  Deregulation brings speculation, speculation causes crisis, crisis leads to harsh regulation.  But after a while, every financial centre realises that they might be able to steal a bit of market share by relaxing the rules a little bit, and the deregulatory cycle begins to turn again.

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The principle of the pendulum almost never fails, and so it’s as close as you can get to a certainty that the European bonus cap will, one day, be removed.  When that day might be, remains hard to tell.  But it’s becoming increasingly obvious that the competitive forces which will eventually lead to its demise are already strongly at work.

Germany, for example, is drawing up plans to get make it easier to dismiss high earners in the finance industry.  This is currently extremely difficult to do; German labour law is set up to try to avoid redundancies whenever possible, and traders and dealmakers on eight-figure bonuses benefit from this protection just the same as metalworkers on €20 an hour.  Whenever there are redundancies in the air at Deutsche Bank, the question of “who’s got a German contract” tends to become hot gossip on London trading floors – it suddenly matters a great deal whether one of your colleagues is, in legal terms, an employee of the UK subsidiary or posted from head office.

Why is Germany thinking of changing this status?  Most likely, because they have heard senior people complaining about the equivalent protections in France. In the aftermath of Brexit, big international banks tried all sorts of tactics to avoid subjecting themselves to European labour laws, mainly involving complicated “chaperoning” arrangements to try and keep the cost base in London while booking the business somewhere else.  Broadly speaking, they didn’t work.

Consequently, the bulge bracket had to bite the bullet and staff up in Paris and Frankfurt.  But they’ve never been happy about it.  Not only do they now have significant headcount in places where “layoff” is a swear word, these employees tend to be the ones with the highest fixed salary component to their compensation.

Getting something done about this has been a top lobbying priority for the banking industry ever since, and it now appears that they are having some success in playing off the European financial centres against one another.  Targeting the redundancy rules first makes sense, as these are national responsibilities rather than being set in European law, but the long term objective has to be the bonus cap itself. 

It was brought in back in 2014, when bankers were the most unpopular people in Europe.  These days, the populist support isn’t necessarily there. “Looking for a man in finance” is the song of the summer.  With the UK already having led the way, it would be foolish to bet on the EU cap surviving another decade.

Separately, if you think that the World Economic Forum in Davos is too boozy-schmoozy but the Milken Global Conference in California is too hippy-dippy, then there’s a new opportunity to hear, as the saying goes “billionaires lecturing millionaires about the working class”.  The “Hamptons Dialogues” are happening under the auspices of the Milken Institute, but rather than sound baths and puppy-cuddling sessions, you will get to hear Bill Ackman tell you exactly what he thinks is wrong with the American university system.

Although that might not sound like $200,000 worth of fun ($25,000 for “reduced access”), the exciting innovation of the Hamptons Dialogues is that the billionaires are hosting the sessions in their own mansions.  The real value in these conferences is always the opportunities for networking at the fringes, and the prospect of being able to have those conversations while admiring (or even better, being uncharitable about) Ken Griffin’s wallpaper is surely more attractive than doing the same thing at a piano bar in Switzerland or a goat-yoga session in Hollywood.

Meanwhile …

One of the reasons why cities want to attract bankers is that so many service industries are downstream of them.  Pure Fitness, which runs the gym on the third floor of the ICBC Tower, has been hit hard by the downturn in banker incomes in the city, and is now apparently in arrears on its rent. (Bloomberg)

BlueCrest, Capula, Dymon, Milllennium and other hedge funds are hiring rates traders in Japan. Around 12 people have made the move. (Bloomberg) 

The FTX scandal nexus is very much not over – Ryan Salame’s partner was a crypto lobbyist called Michelle Bond, and it turns out that his financing of her unsuccessful campaign to be elected to Congress may have broken some campaign finance rules. (WSJ)

Back in the days when Bill Gross was the Bond King, the cognoscenti also knew that Ken Leech of Western Asset Management was royalty.  His record seems to be tarnished, though; after a period of disappointing returns, he has now been placed on a leave of absence as the company investigates a series of allegations of “cherry picking” the assignment of winning and losing trades to favoured client accounts. (Bloomberg)

If you’re feeling lucky today, it might be thanks to Saint Nicholas.  In the Bulgarian Orthodox Church, he’s the patron saint of bankers (as well as sailors, merchants and fishermen, plus the whole Santa Claus thing) and today is his saint’s day. (Radio Bulgaria)

Although he might be looking forward to hosting Hampton Dialogues in his house, Bill Ackman hasn’t had a great summer by most standards.  Among other things, it’s been suggested that some of the anchor investors in his company’s IPO got cold feet when he decided to very publicly endorse Donald Trump. (Institutional Investor)

The saying always goes that money can’t buy happiness, but it gets you a more comfortable kind of misery. A new book from a venture capital billionaire suggests that this is more or less true; having lots of money is great, but the toys and status seeking purchases never really deliver as much as you hope they might. (WSJ)

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