Tuesday, November 22, 2011
First-Year MBAs: Internships and Recruiting
What are current sentiments, trends, and outlook, as MBA students prepare for a tough job market in 2012-13? What are the best tools, advice, and guidelines to get ready?
The Consortium Finance Network hosted a webinar Nov. 22 for first-year Consortium MBAs in finance to discuss strategies for recruiting and securing internships for the summer, 2012.
Panelists included Consortium graduates Eddie Galvan, Denzil Vaughn, and Enoch Kariuki. CFN founding members Tracy Williams and Camilo Sandoval (also a Consortium alumnus) and the Consortium's D-Lori Newsome-Pitts organized the webinar.
Fortunately for students, the hiring environment for 2012 is not as discouraging as it was in 2008-09, when financial institutions worried more about survival than bringing aboard new MBAs. Yet with announcements every other day from banks about rounds of lay-offs, finance students know the task of winning an offer for a meaningful internship will be tricky.
Market volatility in recent months, frenzied discussions about U.S. debt reduction, a stumbling economic recovery and persistent rumblings from Europe all have impact even in hiring MBA students. The webinar provided strategies for new students.
Panelists said there is some optimism--despite all. Financial institutions are in better shape now than they were in 2008. They have stronger capital cushion and are flooded with cash reserves, although they momentarily are suffering from trading losses or slow deal flow. They are, however, hopeful they'll get over a late-2011-2012 hump, endure a long election year and want to be prepared for 2012-13.
Many large firms, panelists said, are optimistic and hopeful, but cautious. There are areas of opportunity (private banking, risk management, middle-market banking, e.g.), but there are also areas of decline or little hope (some sectors in trading). Financial reform, not just economic conditions, will also affect recruiting trends.
For now, financial institutions this fall made the rounds at Consortium and other top business schools, as they usually do, no matter the environment. A few canceled planned presentations on campus--still unsure about deal flow, new clients, new business, and costs to support business efforts in the short term. Most institutions are struggling to count how many spots for MBA internships it will offer. The same institutions have a decades-long history for not getting the number right (over-hiring, under-hiring, and doing so too quickly). They certainly have a habit for changing the expected number throughout the process.
MBAs, nonethless, throughout the post-crisis fracas, continue to have degrees of interest in finance. Over 80 students in this year's Consortium first-year class expressed interest in financial services, banking, sales & trading, investment research, and asset management.
Panelist during the webinar provided a road map for students. How do you take advantage of networks? How do you choose the right finance sector, culture and fit? Why is it important to keep up with current topics? How do you confront technical interviews? Will you succeed in certain environments? How do you impress an institution where you prefer to work? How do you control and master rounds and rounds of interviewing?
Panelists shared stories of how they chose to work at a certain firm, why they chose one firm over another, or why they took a detour and went into a non-banking role. They showed, too, how they tapped networks to find opportunities. They advised on how students can manage academics, recruiting and keeping up with trends and events in markets. They reminded students to handle technical interviews with confidence and preparation.
They discussed trends in diversity. Are the major institutions still committed? Will institutions be committed in all times--good times, downturns, booms?
And once you have the offer, how do you negotiate and accept it? How do you make sure the summer internship leads to a full-time offer? Panelists shared their experiences.
CFN, upon request, will share details of the presentation to Consortium students and alumni.
Tracy Williams
Venture Capital: Diversity Update
If you were to peep inside the corridors of most venture capital firms, including those in pockets of Silicon Valley or those scattered about Manhattan or in the Boston suburbs, would you see encouraging signs of diversity? Would you see a diverse environment, an inclusive culture, or a setting where those from under-represented groups are deeply involved in investment discussions, analyses, presentations, and decision-making?
In those same venture capital firms, would you see women, blacks and Hispanics in prominent professional roles?
Not really, says a survey from the National Venture Capital Association (http://www.nvca.org/). Would you be surprised? Not really, the survey also shows. The business of venture capital (investing in promising start-ups, nurturing new ideas, coaching young entrepreneurs, and facilitating financing in second and third rounds) has a long way to go.
The survey was taken in mid-2011 and follows a similar survey from 2008. The survey was sent to investment professionals and to those in a variety of administrative roles. About 600 responded, providing answers to questions related to race, ethnicity, background and education. Whether optimally scientific or not, the responses weren't surprising. Women, blacks and Hispanics still do not have significant roles in venture capital--at least at the big, world-shaking firms.
What did the survey tell us?
1. Women are not prominent in major roles at venture-capital firms. Only 11 percent of those in investing roles are women, a decline, in fact, from 2008 (14 percent).
2. Women are more involved in life sciences and clean technology (18 percent), less involved in non-high-tech businesses (8 percent).
3. There are signs of progress. Women (both investing professionals and administrators) comprise 28 percent of those under 30.
4. Blacks and Hispanics are virtually invisible in the industry, and there has been little or no progress the past three years. African-Americans and Hispanics (combined) comprise 2 percent of all survey respondents (both investors and administrators)--down from 3 percent in 2008.
5. There are few signs of progress among Blacks and Hispanics. They comprise 3 percent of investing professionals who had less than five years of experience (those who are among the most recent hires).
6. Asians and Asian-Americans have a greater presence at venture-capital firms, but not in significant numbers: 9 percent of all respondents this year, 17 percent of all investing professionals with less than five years of experience.
7. Alumni from prominent graduate schools are present in large numbers at top venture-capital firms. Almost 80 percent have master's, J.D., or Ph.D. degrees; about half have MBAs. Graduates of Harvard, Stanford, Yale, Penn, MIT, Berkeley, Duke, Norwestern, Michigan, and Columbia comprised about half of all the respondents.
8. More than half of respondents had spent some time in their careers as consultants, investment bankers or attorneys, suggesting that one of the best ways to enter the field is to have started out first and gained meaningful experience in one of these roles.
Why are the numbers for under-represented groups woefully low?
Why hasn't there been progress? Is there something that keeps or discourages blacks, Hispanics and women from large-scale entrepreneurial activity and from participating in expected profits and large windfalls from sales of private stock or IPOs?
As most know, the top venture-capital firms tend to be concentrated in hotbeds of entrepreneurial activity, where firms have close access to new ideas, innovation, and eager entrepreneurs, but also access to capital and investors. Silicon Valley and the greater San Francisco area are well-known homes for top ventures firms, but so are Boston, Chicago, and New York.
Top firms, based on the number of deals they've done over the past few years and the amount of capital they manage, include Sequoia Capital, Andreesson Horrowitz, Draper Fisher, Kleiner Perkins, General Catalyst, Accel, Charles River Ventures, Khosla, Oak Investment, and Greylock--many of whom are members of the NVCA and likely had employees and investing professionals who participated in the survey.
Why are those from under-represented groups not intimately involved in the promise, innovation and profit-sharing of venture investing?
1. The venture-capital world is private, clubbish. "Members" know each other well from previous deals, affiliations, and experiences. They know each other in previous roles as bankers, lawyers, and consultants. They may, in fact, know each other from school. They invest in deals and funds within the club; they hire among each other or tap investing talent they know among themselves.
Some firm leaders might have been entrepreneurs before. They benefited from financial support and industry guidance from other venture firms. The survey said more than 15 percent of investing professionals at venture firms were CEOs or heads of other start-ups. Many managed start-ups through early stages, reaped large benefits from the sale of their enterprises, and then invested the wealth in new venture funds. Marc Andreessen, a Netscape founder, and Peter Thiel, PayPal's founder, are now widely known as venture investors.
2. Venture firms are narrowly focused on the next deal, the next new idea, and the next entrepreneur who has a "disrupting" vision. They are seldom motivated by or caring enough to ensure diversity among their professional staff. Institutions, investors, and funds that provide capital for the venture fund don't hold firms accountable. Because transactions and relationships are private, they aren't likely to push to make firm's culture inclusive and or push to provide opportunities for those from a variety of backgrounds.
3. Venture firms, not held accountable and operating in closed-door environments, are likely to be unaware, uninformed or unperceptive of diversity's benefits.
4. Venture firms tend to be marginally staffed. They include investor professionals, principals, partners, analysts, and researchers. They also include attorneys, administrators, and financial staff. They are not likely to have personnel who pursue diversity-related initiatives and programs, who hold the firm's leaders accountable to fairness, opportunities and diversity, or who prompt the firm to catch up or keep up in related issues.
5. Venture firms aren't likely familiar with diversity pipeline programs or aren't aware that blacks, women, and Hispanics in numbers are interested in venture capital, private equity and fund investing and attend the same top business schools that their leaders did. Blacks, Hispanics, Asians and women who find their ways into the sheltered cultures are likely to have attended the same schools and found a pathway from school ties, summer internships, or experiences in investment banking or consulting.
Despite the dismal numbers, some African-Americans, Hispanics and women have punctured the closed doors. Some have started their own funds or have found a way into top spots at the bigger venture capital or private-equity firms (Ronald Blaylock's GenNx360 Capital, e.g.).
Nonetheless, applaud the NVCA. First, it dares to conduct such a survey and report its results widely, even if there isn't yet much to celebrate while progress is stiflingly slow. Second, it states it has objectives to improve the numbers. Its president Mark Heesen said in a recent release, "Ideally, we would like to see a professional base that reflects the entrepreneurs in which we invest, one that is robust and diverse in terms of gender, ethnicity, nationality and age."
In other words,the NVCA is daring to hold the industry accountable, if it doesn't do so itself.
Tracy Williams
In those same venture capital firms, would you see women, blacks and Hispanics in prominent professional roles?
Not really, says a survey from the National Venture Capital Association (http://www.nvca.org/). Would you be surprised? Not really, the survey also shows. The business of venture capital (investing in promising start-ups, nurturing new ideas, coaching young entrepreneurs, and facilitating financing in second and third rounds) has a long way to go.
The survey was taken in mid-2011 and follows a similar survey from 2008. The survey was sent to investment professionals and to those in a variety of administrative roles. About 600 responded, providing answers to questions related to race, ethnicity, background and education. Whether optimally scientific or not, the responses weren't surprising. Women, blacks and Hispanics still do not have significant roles in venture capital--at least at the big, world-shaking firms.
What did the survey tell us?
1. Women are not prominent in major roles at venture-capital firms. Only 11 percent of those in investing roles are women, a decline, in fact, from 2008 (14 percent).
2. Women are more involved in life sciences and clean technology (18 percent), less involved in non-high-tech businesses (8 percent).
3. There are signs of progress. Women (both investing professionals and administrators) comprise 28 percent of those under 30.
4. Blacks and Hispanics are virtually invisible in the industry, and there has been little or no progress the past three years. African-Americans and Hispanics (combined) comprise 2 percent of all survey respondents (both investors and administrators)--down from 3 percent in 2008.
5. There are few signs of progress among Blacks and Hispanics. They comprise 3 percent of investing professionals who had less than five years of experience (those who are among the most recent hires).
6. Asians and Asian-Americans have a greater presence at venture-capital firms, but not in significant numbers: 9 percent of all respondents this year, 17 percent of all investing professionals with less than five years of experience.
7. Alumni from prominent graduate schools are present in large numbers at top venture-capital firms. Almost 80 percent have master's, J.D., or Ph.D. degrees; about half have MBAs. Graduates of Harvard, Stanford, Yale, Penn, MIT, Berkeley, Duke, Norwestern, Michigan, and Columbia comprised about half of all the respondents.
8. More than half of respondents had spent some time in their careers as consultants, investment bankers or attorneys, suggesting that one of the best ways to enter the field is to have started out first and gained meaningful experience in one of these roles.
Why are the numbers for under-represented groups woefully low?
Why hasn't there been progress? Is there something that keeps or discourages blacks, Hispanics and women from large-scale entrepreneurial activity and from participating in expected profits and large windfalls from sales of private stock or IPOs?
As most know, the top venture-capital firms tend to be concentrated in hotbeds of entrepreneurial activity, where firms have close access to new ideas, innovation, and eager entrepreneurs, but also access to capital and investors. Silicon Valley and the greater San Francisco area are well-known homes for top ventures firms, but so are Boston, Chicago, and New York.
Top firms, based on the number of deals they've done over the past few years and the amount of capital they manage, include Sequoia Capital, Andreesson Horrowitz, Draper Fisher, Kleiner Perkins, General Catalyst, Accel, Charles River Ventures, Khosla, Oak Investment, and Greylock--many of whom are members of the NVCA and likely had employees and investing professionals who participated in the survey.
Why are those from under-represented groups not intimately involved in the promise, innovation and profit-sharing of venture investing?
1. The venture-capital world is private, clubbish. "Members" know each other well from previous deals, affiliations, and experiences. They know each other in previous roles as bankers, lawyers, and consultants. They may, in fact, know each other from school. They invest in deals and funds within the club; they hire among each other or tap investing talent they know among themselves.
Some firm leaders might have been entrepreneurs before. They benefited from financial support and industry guidance from other venture firms. The survey said more than 15 percent of investing professionals at venture firms were CEOs or heads of other start-ups. Many managed start-ups through early stages, reaped large benefits from the sale of their enterprises, and then invested the wealth in new venture funds. Marc Andreessen, a Netscape founder, and Peter Thiel, PayPal's founder, are now widely known as venture investors.
2. Venture firms are narrowly focused on the next deal, the next new idea, and the next entrepreneur who has a "disrupting" vision. They are seldom motivated by or caring enough to ensure diversity among their professional staff. Institutions, investors, and funds that provide capital for the venture fund don't hold firms accountable. Because transactions and relationships are private, they aren't likely to push to make firm's culture inclusive and or push to provide opportunities for those from a variety of backgrounds.
3. Venture firms, not held accountable and operating in closed-door environments, are likely to be unaware, uninformed or unperceptive of diversity's benefits.
4. Venture firms tend to be marginally staffed. They include investor professionals, principals, partners, analysts, and researchers. They also include attorneys, administrators, and financial staff. They are not likely to have personnel who pursue diversity-related initiatives and programs, who hold the firm's leaders accountable to fairness, opportunities and diversity, or who prompt the firm to catch up or keep up in related issues.
5. Venture firms aren't likely familiar with diversity pipeline programs or aren't aware that blacks, women, and Hispanics in numbers are interested in venture capital, private equity and fund investing and attend the same top business schools that their leaders did. Blacks, Hispanics, Asians and women who find their ways into the sheltered cultures are likely to have attended the same schools and found a pathway from school ties, summer internships, or experiences in investment banking or consulting.
Despite the dismal numbers, some African-Americans, Hispanics and women have punctured the closed doors. Some have started their own funds or have found a way into top spots at the bigger venture capital or private-equity firms (Ronald Blaylock's GenNx360 Capital, e.g.).
Nonetheless, applaud the NVCA. First, it dares to conduct such a survey and report its results widely, even if there isn't yet much to celebrate while progress is stiflingly slow. Second, it states it has objectives to improve the numbers. Its president Mark Heesen said in a recent release, "Ideally, we would like to see a professional base that reflects the entrepreneurs in which we invest, one that is robust and diverse in terms of gender, ethnicity, nationality and age."
In other words,the NVCA is daring to hold the industry accountable, if it doesn't do so itself.
Tracy Williams
Tuesday, November 8, 2011
MF Global: Too Small to Save
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| Not the same impact as Lehman |
MF Global, the futures brokerage firm, filed for bankruptcy. It was deemed too small to save. MF Global was not a household name (but so wasn't Bernard Madoff before the world found out about that fraud). Few outside the industry knew much about MF Global. Some knew that former New Jersey Governor Jon Corzine was its CEO. And they knew Corzine had been the head at Goldman Sachs in the 1990s.
MF Global was known as a major player in futures and commodities brokerage. It had institutional client accounts with hedge funds, pension funds, corporations, banks, other brokerages, and other trading firms. It facilitated futures and commodities trading on all the important derivatives exchanges around the world and special trading over the counter.
For the most part, it acted in intermediary roles, a broker for clients who wished to engage in futures and commodities trading for hedging purposes or for taking a bet or view on interest rates, crude oil, foreign currencies, or stock indices. Clients deposited funds at the firm, and the firm facilitated trading at futures and commodities exchanges or "over the counter." It earned commissions (or "mark-ups"). Client funds not yet deployed for transaction purposes were supposed to be deemed "safe" and "segregated."
MF Global was supposed to be somewhat insulated from virulent swings in markets, as long as there was some activity or some transaction for which it could charge a commission. While clients try to hedge against market swings, MF Global is supposed to thrive in market volatility, not suffer inexplicable trading losses that lead to bankruptcy.
Entered Corzine, recovering from a devastating loss for reelection for a gubernatorial term in New Jersey and perhaps hoping to write a thrilling second chapter to his career on Wall Street. He felt he could be the catalyst to wake up a sleeping MF Global, which had stumbled through a few performance and risk-management issues before he arrived.
To provide earnings spark and improve performance, Corzine felt he needed to reinvent MF Global. It wouldn't move away from its core brokerage expertise, but it needed to be more daring. It would take risks in the same way Goldman evolved to become a trading powerhouse under his helm in the 1990s.
MF's demise has caused ripples in markets, not a Lehman-like thunderous roar. Its disappearance won't be a threat to the global financial system. But many market participants wonder whether other medium-sized brokerage houses are similarly vulnerable or could be next. Who could be next? Unfortunately, too, at MF Global, regulators are scrambling to locate hundreds of millions of dollars of missing customer funds. Many experienced brokerage personnel at the firm must look elsewhere for work. (Over 900 were let go this week.)
What happened at MF? What hastened its demise?
1. Corzine likely tried to hard too fast to replicate parts of Goldman and had a stubborn belief in his old, successful ways. About a year after Corzine had settled in, MF Global started to suffer substantial losses from leveraged bets on Europe sovereign debt this year (exploiting its access to "repo" markets and credit-default swaps, but stumbling soon thereafter).
2. Risk management lacked a voice or authority to restrain the trading and the firm's piling up of risks. It certainly lacked authority to second-guess Corzine. He presided over a risk-management structure that didn't allow risk managers to say "no" or "slow down."
3. MF was non-responsive to regulators' persistent requests to increase its capital base. Capital might have been adequate for a pure-brokerage role, but it wasn't when it began to engage in proprietary trading on a large scale. Instead of boosting capital to comply with requests, Corzine and team would lead arguments for why it felt new capital wasn't necessary.
Are there lessons to be learned from the MF Global mini-crisis?
1. Leveraged trading is still risky, even if it involves trading government securities.
2. Risk management within financial institutions must have an authoritative voice to be effective.
3. Old, successful ways of making money in trading may not be magical and profitable at a different firm in a different era in apparently different market scenarios.
4. Plain-vanilla brokerage and banking businesses may not always lead to stellar returns, but can help ensure long-term survival.
What happens over the next year or two?
1. The bankruptcy will run its course. It will continue to be a business headline, because customer funds and deposits are missing and can't be accounted for. Regulators, market watchers, and business media will persist in asking how that could happen. They will blame woefully inadequate operations, and some will suspect fraud.
2. Exchanges and regulators will ponder rules changes to discourage futures brokerages from taking big proprietary-trading risks. As with other financial reform, new rules will be thoroughly discussed, but won't be implemented soon.
3. MF Global will become a broker/dealer-industry footnote like Rothshild, Hutton, Refco, and Drexel. That it will become a footnote in the history of finance is probably good. It meant it was too small to save, just a market ripple.
Tracy Williams
BE's Who's Who on Wall Street, 2011
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| Chris Williams of Williams Capital |
In its latest issue (http://www.blackenterprise.com/), it decided now is a good time to update its list, although Wall Street, banking and trading have experienced many bumps and bruises in 2011. It failed to answer conclusively whether African-Americans took unfair, backward steps in diversity progress among top banks, brokers and financial institutions. Everybody took hits during 2009-10, all groups and genders, including African-Americans in entry and middle-level roles. We all saw the industry reduce staff by the thousands during the crisis.And we saw how some on their own fled the industry to avoid stress and uncertainty or to explore other opportunities with less strain.
With signs of an upturn in 2010 and with institutions recommitting themselves to older diversity initiatives, it's not yet clear whether blacks are returning to Wall Street in the same numbers as before. Banks are reaching out to hire African-Americans interested in banking and finance, but like many in the population, blacks may not be raising their hands as they did in the 1990s and early 2000s. Many don't want to confront anxiety, possible layoffs, and going to work not sure where the industry is headed in the next year. Many on the inside confront that now, as we head into bonus and appraisal season.
In its latest list, however, Black Enterprise observed that many senior African-Americans in the industry continue in senior roles. The latest list includes familiar names, people who have been top players in investment banking, investment management, and private equity for the past 10-15 years; some more than 20 years.
Many on the list include top executives of familiar black-owned firms: Chris Williams (above) of Williams Capital, John Rogers of Ariel Investments, Bernard Beal of M.R. Beal, Tracy Maitland of Advent Capital, Donald Rice of Rice Financial, James Reynolds of Loop Capital, and Calvin Grigsby of Grisby Associates.
The list also includes known investment bankers, managing directors or senior advisers at top banks--those prominent in mergers and acquisitions, corporate finance, municipal finance or corporate advisory: Raymond McGuire at Citi, Rodney Miller at JPMorgan, Carla Harris and Melissa James at Morgan Stanley, and William Lewis at Lazard.
It includes an impressive number who have made their marks in private equity: Ronald Blaylock, founder at GenNx360 Capital, Terry Jones of Syncom Venture Partners, Raymond Whiteman of Carlyle, and Adebayo Ogunlesi at Global Infrastructure (a GE venture).
Most of the above have had long careers on Wall Street (more than 20 years); many started at major banks and moved on to start their own firms after gaining experience, contact and access to capital.
The BE list includes a couple who made their names elsewhere, but turned to Wall Street in the latter parts of their careers: Robert Johnson of BET fame and fortune is on the list for having started a middle-market private-equity firm. Vernon Jordan, best known for his roles at the National Urban League and as a Clinton presidential insider, is a senior managing director at Lazard.
The list, for some reason, excludes Roger Ferguson, CEO of TIAA-CREF, the large retirement fund with over $480 billion in assets. Ferguson is also a former governor at the Federal Reserve. And it excludes Kenneth Chenault, CEO of American Express, arguably more powerful than all 75 on the current list. Black Enterprise couldn't have forgotten him, since it has featured him often on covers and in articles over the past two decades.
Black Enterprise's list shows where there might be gaps on Wall Street, segments of financial services where blacks have virtually no role, are negligible in numbers or have not been able to penetrate at all--even if they have desire and interest. The list, for example, doesn't include many blacks who are sufficiently senior to be included in equity research, industry analysts who present their financial views of companies publicly and whose opinions about specific companies or macroeconomic trends can move markets in minutes.
Notably, the list doesn't include many African-Americans who are senior traders at prominent hedge funds or high-frequency trading firms or who are partners at Silicon Valley venture capital firms. That might not be an accident. Market-influencing hedge funds, high-frequency trading firms and ground-breaking venture firms are private. They operate in hush-hush environments. They tend to hire among small circles in tight networks and are indifferent to the benefits of diversity. Young African-Americans learn about these firms at business school, in exploring opportunities in finance, and from networks.But they have tough times when they knock on those doors--at least in junior positions.
Black Enterprise's list, once again, shows there are indeed many blacks--even post-crisis--who aspire to careers on Wall Street, who want to trade, invest, do research, manage portfolios, advise companies and finance start-ups, who want to help companies and municipalities fund operations, and who want to consider starting their own boutiques and shops when they are ready.
Tracy Williams
Thursday, November 3, 2011
Here They Come, the Volcker Rules
Like it or not, the Volcker rules are coming. Ready or not, banks confront the new reality. Banks reported a gush of trading-related revenues in the 2000s. Going forward, they will not be permitted to engage in proprietary trading in the way they have done successfully the past decade.
Banks, including old commercial banks and investment banks that turned into bank holding companies, maintained trading units and ran them like internal hedge funds. They were allowed to use capital to support trading in most any instrument they felt they had expertise in or perceived profit opportunities. They traded equities, held positions long or short, traded equity derivatives, and traded equity-linked swaps. Big banks, like JPMorgan, Citi, or Goldman Sachs, reported profits, had substantial roles in all markets, and attracted talent. Small community banks shied away.
They could execute "black blox" trades, high-frequency algorithms, or deal in"exotics." Analysts described Goldman as a trading firm or hedge fund disguised as an investment bank. Morgan Stanley, for many years, operated a closed-doors proprietary trading group, featuring traders with doctorates with complex ideas about exotic trades and statistical arbitrage.
Banks organized and managed desks in bonds, structured notes, mortgages, foreign currencies, convertible bonds, options, and high-yield debt. They traded in every imaginable derivative--from currency swaps to credit-default swaps and asset-backed indices. They took positions, took risks in market trends, and bet in the long term or short term.
And none of this trading was required to accommodate customers, although selling to or buying from investors who were clients was a significant part of the business.
Dodd-Frank and other bank regulation around the globe are curtailing prop-trading at commercial banks, at bank holding-companies, and at any financial institution that has a deposit-taking business in its vicinity. For months, banks have been re-engineering their operations to comply with expected rules changes. More important, they are scrambling to figure out how they will replace profits from trading with other revenue sources to generate similar returns on equity. The clock is ticking.
Or perhaps they will learn to settle for lower returns on equity, but more stable performance from quarter to quarter.
Banks knew the rules were coming, ever since the frantic aftermath of 2008-09 when former Federal Reserve chairman Paul Volcker proposed the abolition of prop-trading at banks. He, as well as politicians, regulators and the public at large, reasoned prop-trading contributed to or exacerbated the crisis. A year after the passing of Dodd-Frank legislation, banks are hustling to offset expected loss revenues, make sense of the rules, and figure out what they can and cannot do.
The rules permit client-flow trading. Banks won't be forced to shut down their trading operations. They can maintain trading positions if they exist to accommodate a client wishing to buy or sell securities or derivatives. That's not as easy as it sounds.
The rules that explain client-related flow trading are difficult to interpret and even harder to comply with: If a bank purchases equities from a client and hold them for a week, is that client-related trading? If a bank purchases corporate bonds in anticipation of clients wanting to buy them, is that client-related trading? If a bank purchases securities and re-sells them for an above-normal profit within a day, is that client-related trading?
Banks are huddling among themselves to understand what the rules will permit or prohibit. Banks also are puzzled to determine what is an infraction. The rules, for example, let regulators infer that prop-trading exists if banks report excess trading revenues or volatile trading revenues, even if it appears all trading is tied to a client request.
Trades for hedging purposes will be permitted. Yet hedges are hard to interpret. When is a hedge really a hedge? What if equity positions are hedged 100 percent one day, but market movement causes the same position to be hedged 90 percent the next week? The rules are subject to interpretation. But no bank wants to be subject to a penalty or subpoena. Some banks will not want to absorb unusual legal costs to interpret every aspect of the rules.
Some major banks (such as JPMorgan, Bank of America, and Morgan Stanley)--especially those with significant institutional and hedge-fund clients--will dig in, continue to maintain trading desks for client flows, and learn with difficulty to live within the rules. They anticipate declining trading revenues, but hope other client business (e.g., equity IPOs, M&A mandates or cash-management services) will offset the declines.
Other banks--especially those that weren't major traders or those with negligible success in prop-trading--will abandon trading altogether.
The big banks that stick it must invest in systems and hire compliance people to monitor trading activity to make sure they obey rules. They prefer to invest in other revenue-generating projects, but if they choose to retain trading desks, they will learn to live with constraints, limits, and compliance costs.
Banks don't broadcast all the repercussions of limited trading, but there are other implications. Some analysts rationalize the disappearance of prop-trading revenues could push ROEs, customarily above 15%, down to 10% and below, even in the best of times, unless they find offsets or new products and services.
Bank trading arms attracted smart, talented traders, researchers, and black-box theorists. This group will now seek to work for hedge funds, private-equity firms, and broker/dealers. Cynics argue that's fine, since the same group might have contributed to the exotic products that led to the crisis.
Bank trading units have long been centers of innovation, new ideas, and new products. Hedge funds and private-equity firms spawn ideas, too. But the Goldmans and Morgan Stanleys with global networks, securities distribution arms, research groups, market intelligence, investing clients and capital often acted as incubators for new products or ways of trading. Lower profitability will discourage them from devoting resources to new products or trading ideas.
Again, cynics, regulators and many in the general public say that's fine. New trading products and ideas should be, they say, developed slowly, and their risks and impact on markets analyzed and studied in depth.
Bank trading units may scale down their market-making and dealing roles. Banks had capital and resources to act as market-makers across multiple products. They provided vast amounts of liquidity in derivatives, bonds, and currencies. Will liquidity be jeopardized if banks de-emphasize trading? Will banks be less willing to assist institutional clients in hedging strategies or if it wants to avoid penalties lest regulators misinterpret the position?
Tough questions for big banks, but with solutions that might make them uncomfortable for a while.
Tracy Williams
_________________________
For more on the Volcker Rules, see also CFN post of June-2010:
http://consortiumfinancenetwork.blogspot.com/2010/06/volckerized.html
Banks, including old commercial banks and investment banks that turned into bank holding companies, maintained trading units and ran them like internal hedge funds. They were allowed to use capital to support trading in most any instrument they felt they had expertise in or perceived profit opportunities. They traded equities, held positions long or short, traded equity derivatives, and traded equity-linked swaps. Big banks, like JPMorgan, Citi, or Goldman Sachs, reported profits, had substantial roles in all markets, and attracted talent. Small community banks shied away.
They could execute "black blox" trades, high-frequency algorithms, or deal in"exotics." Analysts described Goldman as a trading firm or hedge fund disguised as an investment bank. Morgan Stanley, for many years, operated a closed-doors proprietary trading group, featuring traders with doctorates with complex ideas about exotic trades and statistical arbitrage.
Banks organized and managed desks in bonds, structured notes, mortgages, foreign currencies, convertible bonds, options, and high-yield debt. They traded in every imaginable derivative--from currency swaps to credit-default swaps and asset-backed indices. They took positions, took risks in market trends, and bet in the long term or short term.
And none of this trading was required to accommodate customers, although selling to or buying from investors who were clients was a significant part of the business.
Dodd-Frank and other bank regulation around the globe are curtailing prop-trading at commercial banks, at bank holding-companies, and at any financial institution that has a deposit-taking business in its vicinity. For months, banks have been re-engineering their operations to comply with expected rules changes. More important, they are scrambling to figure out how they will replace profits from trading with other revenue sources to generate similar returns on equity. The clock is ticking.
Or perhaps they will learn to settle for lower returns on equity, but more stable performance from quarter to quarter.
Banks knew the rules were coming, ever since the frantic aftermath of 2008-09 when former Federal Reserve chairman Paul Volcker proposed the abolition of prop-trading at banks. He, as well as politicians, regulators and the public at large, reasoned prop-trading contributed to or exacerbated the crisis. A year after the passing of Dodd-Frank legislation, banks are hustling to offset expected loss revenues, make sense of the rules, and figure out what they can and cannot do.
The rules permit client-flow trading. Banks won't be forced to shut down their trading operations. They can maintain trading positions if they exist to accommodate a client wishing to buy or sell securities or derivatives. That's not as easy as it sounds.
The rules that explain client-related flow trading are difficult to interpret and even harder to comply with: If a bank purchases equities from a client and hold them for a week, is that client-related trading? If a bank purchases corporate bonds in anticipation of clients wanting to buy them, is that client-related trading? If a bank purchases securities and re-sells them for an above-normal profit within a day, is that client-related trading?
Banks are huddling among themselves to understand what the rules will permit or prohibit. Banks also are puzzled to determine what is an infraction. The rules, for example, let regulators infer that prop-trading exists if banks report excess trading revenues or volatile trading revenues, even if it appears all trading is tied to a client request.
Trades for hedging purposes will be permitted. Yet hedges are hard to interpret. When is a hedge really a hedge? What if equity positions are hedged 100 percent one day, but market movement causes the same position to be hedged 90 percent the next week? The rules are subject to interpretation. But no bank wants to be subject to a penalty or subpoena. Some banks will not want to absorb unusual legal costs to interpret every aspect of the rules.
Some major banks (such as JPMorgan, Bank of America, and Morgan Stanley)--especially those with significant institutional and hedge-fund clients--will dig in, continue to maintain trading desks for client flows, and learn with difficulty to live within the rules. They anticipate declining trading revenues, but hope other client business (e.g., equity IPOs, M&A mandates or cash-management services) will offset the declines.
Other banks--especially those that weren't major traders or those with negligible success in prop-trading--will abandon trading altogether.
The big banks that stick it must invest in systems and hire compliance people to monitor trading activity to make sure they obey rules. They prefer to invest in other revenue-generating projects, but if they choose to retain trading desks, they will learn to live with constraints, limits, and compliance costs.
Banks don't broadcast all the repercussions of limited trading, but there are other implications. Some analysts rationalize the disappearance of prop-trading revenues could push ROEs, customarily above 15%, down to 10% and below, even in the best of times, unless they find offsets or new products and services.
Bank trading arms attracted smart, talented traders, researchers, and black-box theorists. This group will now seek to work for hedge funds, private-equity firms, and broker/dealers. Cynics argue that's fine, since the same group might have contributed to the exotic products that led to the crisis.
Bank trading units have long been centers of innovation, new ideas, and new products. Hedge funds and private-equity firms spawn ideas, too. But the Goldmans and Morgan Stanleys with global networks, securities distribution arms, research groups, market intelligence, investing clients and capital often acted as incubators for new products or ways of trading. Lower profitability will discourage them from devoting resources to new products or trading ideas.
Again, cynics, regulators and many in the general public say that's fine. New trading products and ideas should be, they say, developed slowly, and their risks and impact on markets analyzed and studied in depth.
Bank trading units may scale down their market-making and dealing roles. Banks had capital and resources to act as market-makers across multiple products. They provided vast amounts of liquidity in derivatives, bonds, and currencies. Will liquidity be jeopardized if banks de-emphasize trading? Will banks be less willing to assist institutional clients in hedging strategies or if it wants to avoid penalties lest regulators misinterpret the position?
Tough questions for big banks, but with solutions that might make them uncomfortable for a while.
Tracy Williams
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For more on the Volcker Rules, see also CFN post of June-2010:
http://consortiumfinancenetwork.blogspot.com/2010/06/volckerized.html
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