May 8 (Bloomberg) -- In the five years that John Silvetz made about $700 million for Deutsche Bank AG by trading corporate bonds and credit derivatives, the share of his annual bonus paid in cash dropped to 20 percent from almost 70 percent.
The rest, earned by betting on companies from American International Group Inc. to MBIA Inc., was locked up in deferred stock and euros, according to people familiar with the matter, who asked not to be identified because they aren’t authorized to discuss compensation. In September, Silvetz, 37, jumped to hedge fund BlueCrest Capital Management LLP. He was the last of a trio of New York debt traders who departed after making $1 billion for the German lender in two years, the people said.
Wall Street’s biggest banks have lost almost two dozen of their most-profitable credit traders in the past 13 months as regulators limit the kind of risk-taking that amplified the housing crisis four years ago. As banks slash or defer pay and reduce the amount they’re willing to wager, the traders are seeing better opportunities at hedge funds and investment firms that seek to profit in markets lenders are retreating from.
“People who were contributing quite a bit to the overall profitability of the firms are forced to move on,” said Doug Shaener, managing partner at Quest Group, a New York-based executive search consulting firm that specializes in financial services. “You’re seeing individuals looking to go to places where they obviously aren’t as regulated, where they don’t have as many restrictions in terms of their trading.”
Responding to Pressure
More than three years after bad bets on housing led to the collapse of Lehman Brothers Holdings Inc. and emergency sales of Bear Stearns Cos. and Merrill Lynch & Co., lenders are responding to toughened capital rules that damp risk-taking and make trades costlier.
In the U.S., the so-called Volcker rule, the provision in the 2010 Dodd-Frank Act named for former Federal Reserve Chairman Paul Volcker, will set limits on risk-taking by depositories with government backing.
Traders are fleeing cash bonuses that were capped last year at 65,000 pounds ($105,000) at U.K. lender Barclays Plc, 100,000 euros ($131,000) at Frankfurt-based Deutsche Bank and $125,000 at Morgan Stanley in New York, according to data compiled by Bloomberg. For some at Charlotte, North Carolina-based Bank of America Corp., cash bonuses were limited to $150,000.
Hedge funds are offering managing director-level traders salaries of about $200,000 to $250,000, said Michael Karp, managing partner at New York executive recruiter Options Group. Some of the largest hedge funds may pay bonuses of as much as 12 percent of traders’ profits, or an even bigger percentage of their earnings after the firm takes a 2 percent cut, according to Options Group.
Unlike the banks, the funds typically pay 50 percent or more of bonuses to their highest earners in cash, according to New York-based compensation consulting firm Johnson Associates Inc. The rest may be locked up in funds the firms manage.
“It’s a buyer’s market” for the hedge funds, Karp said. “People are figuring out how to trade in this new world.”
Silvetz’s departure from Deutsche Bank followed those of Prakash Narayanan and Thomas Curran, who together made more than $1 billion for Germany’s biggest bank in 2009 and 2010, the people with direct knowledge of the situation said. Silvetz, Narayanan and Curran declined to comment.
Brian Maggio left Barclays’s credit-trading team in New York in March for Millennium Management LLC, a hedge fund with $15.6 billion invested. In the five years ended in December, the trader made an estimated $375 million for Barclays and Lehman, where he worked until the firm filed for bankruptcy in September 2008, according to two people familiar with the matter. Maggio’s exit followed those of Barclays colleagues Jason Quinn and Peter Agnes, both of whom went to Caxton Associates LP in New York.
Maggio and Quinn declined to comment. Agnes, who didn’t respond to messages left on his mobile phone, was part of a proprietary-trading group dealing in credit markets that wouldn’t be allowed under the Volcker rule and has been shut down, according to a person familiar with the matter.
Barclays is among banks including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley that have shut proprietary-trading groups.
Goldman Sachs credit traders Matthew Knopman and Philip Ha left the New York firm earlier this year, with Knopman starting at Anchorage Capital Group LLC this month and Ha going to MKP Capital Management LLC, people familiar with the moves said in March. Rob Jackson joined Cyrus Capital Partners LP from Goldman Sachs in February.
High-yield bond trader Jerry Cudzil departed Morgan Stanley to head U.S. credit trading at TCW Group Inc., which was managing $73.3 billion in fixed-income assets as of March 31. Peter Viles, a spokesman for Los Angeles-based TCW, confirmed the hire.
BlueCrest this month added Deutsche Bank credit trader Stefano Galiani, according to three people familiar with the matter. It brought on Morgan Stanley’s Eugene Gokhvat in April, according to BlueCrest spokesman Ed Orlebar, who said he couldn’t comment about Galiani.
Representatives of Deutsche Bank, Barclays, Goldman Sachs, Morgan Stanley and Bank of America declined to comment.
“Many of the major investment banks just don’t have the capital they used to, and a lot of that is because of the Volcker rule,” Marc Lasry, co-founder of Avenue Capital Group LLC, said May 2 in an interview with Bloomberg TV’s Stephanie Ruhle at the Milken Institute Global Conference.
‘Very Different Business’
Regulations limiting banks’ proprietary trading “has been great” for his New York-based hedge fund, he said. “Nobody’s really competing with you as much as they used to.”
Unlike equities, fixed-income trades typically are privately negotiated outside exchanges, increasing the fees traders collect by making bids and offers because they’re more difficult to execute.
To make markets in debt securities, banks typically risk their own capital to buy assets from clients before lining up someone else to sell them to, sometimes making bets on the direction of markets. The new rules are curbing that, turning traders more into middlemen.
“It’s turning into a very different business than it once was,” John Reed, head of credit trading at Kohlberg, Kravis Roberts and Co. in San Francisco, said in a telephone interview.
Reed joined the private-equity firm in 2008 from Bear Stearns, the investment bank that sold itself to JPMorgan that year to avoid collapse.
Next page: Implementing Volcker