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Morning Coffee: The 'tidal wave' that could wipe out banking bonuses and jobs. Disappointment for $130k a month trader

If you want a nice relaxing summer in finance, you probably don't want to read the Financial Times' 'Big Read' article from yesterday pondering how the pandemic will play out. Finance industry veterans - some of them unfettered from big roles and therefore free to speak frankly - sound the alarm about what might be coming next. 

"Please explain to me where the earnings are coming from?" demands ex-Barclays CEO Bob Diamond, in reference to national banks facing a combination of zero interest rates and "significant credit exposure." Bill Coen, former head of the Basel committee of international banking regulators, says the first phase of the crisis was managed well by governments but that the second could be very different: “We are now approaching the second wave of stress, a tidal wave of credit issues, so it’s far too early to claim victory yet.”

This 'tidal wave of credit issues' loomed into view in recent weeks as banks reported second quarter results. In the first six months of COVID-19 the FT notes that the 15 largest U.S. banks have already set aside $76bn to cover projected bad debts, while the 32 largest European banks have set aside €56bn. These are upfront estimates as regulators compel banks to estimate lifetime losses on bad debts across the economic cycle. But things could still get worse.

Already there is talk of mergers and cost-cutting, particularly among struggling European banks. Stuart Graham, founder of Autonomous Research, says "there is a lot of pressure [for banks] to fundamentally readjust their cost base, organically or through consolidation." Ronit Ghose, head of bank research at Citi, said consolidation is unlikely: “So instead we face more cost cuts, sadly.”

It's this that will hang fetidly over the banking sector in the coming months and potentially years. Although the FT also unearthed optimists like ex-Citi CEO Vikram Pandit, who claim that prudent consumers are less indebted than in 2008 and that ultimate losses will therefore be lower, fears of a tidal wave of credit writedowns can be expected to provoke extreme cautiousness over costs, hiring and compensation. Some banks have been busy upgrading trading talent, but net additions to headcount seem unlikely. So too do widespread big bonuses rewarding individuals for performance facilitated by market conditions. Instead, with talk of further lockdowns, the looming end to government furlough schemes and collapsing rents on commercial property, ongoing writedowns seem a reality. Aggressive cost cutting may be the only answer. 

Separately, Rohan Ramchandani, Citi's ex-head of EMEA G10 Spot FX trading, managed to both win and lose his court case against the bank.  

Rohan Ramchandani took Citi to court for unfair dismissal after he was sacked by Citi in 2014 and then charged with and then acquitted of foreign exchange rigging by the U.S. Department of Justice. Ramchandani, who was reportedly known as 'Rainman' at Citi because of his maths skills, wanted Citi to give him his old job back. Had the bank done so, he would have been eligible for all his back pay and potential bonuses since 2014. Instead, the court ruled that Ramchandani would have been terminated in any case due to his conduct, but that Citi didn't follow the correct procedures in letting him go. As a result, Ramchandani's compensation is capped at around £80k ($105k), which is less than the £100k ($130k) a month he earned at Citi.

Meanwhile...

John Flint, the former chief executive of HSBC, has said that he is ready for “new adventures.” Right. (Financial News) 

Stephen Jones, ex-CEO of UK Finance and former banker at Barclays, told the bank's head of compliance that Amanda Stavely was "thick as sh*t" but had "large breasts." (Bloomberg) 

Former JPMorgan asset manager Fahad Roumani has set up a hedge fund called Palm Lane Capital, which has received $150m from Blackstone. (Bloomberg) 

800 of 2,500 employees are back in Deutsche Bank's Frankfurt headquarters. (Handelsblatt) 

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Photo by Joe R Harris on Unsplash

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AUTHORSarah Butcher Global Editor
  • Ca
    Caleb Gibbons
    11 August 2020

    Largely to meet regulatory requirements post GFC, a literal army of risk management expertise has been hired & upgraded across the banking industry since 2008. It is time for them to show their value. Material exposures first, followed by the rest on a portfolio basis need to be analyzed and requisite risk rating and PD (probability of default) revised for the new C-19 realities (lower rating, higher PD for >90% of credits). LGD (loss given default) may tick down in all but the most dire of scenarios as government largess has provided a significant backstop (less so funded, but certainly on a "promised" basis) and all levers in terms of mitigation, covenants and collateral will get the "once over". On all metrics global banks are better capitalized and their investment banking divisions are less levered (smaller inventories, lower VaR) than the crisis endured a mere 12 years ago. Government support has seen record public bond issuance ytd in 2020, i.e. more credit risk in the hands of investors vs. sitting on the balance sheet of banks. Restrictions on dividends, stock buybacks and comp abound and will serve to (or at least attempt to) plug the leaks not related to extraordinary credit events. Being a bank equity shareholder will no longer be a slam dunk, without the buffer of a robust 40% dividend payout on record earnings added to the "cloudy with a chance of meatballs" credit situation which will take 24-36 months to size vs. early days reserves for credit losses. Lending clearly still needs to happen if the downstroke of the "W" is not to fall off the chart.

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