Billion-dollar traders quit Wall Street for hedge fund pay

New regulations send bank traders packing for greener pastures

Implementing Volcker

“The banks have reduced capital allocation to trading desks and cut back traders’ ability to take risk,” he said.

The 21 primary dealers that trade directly with the Fed have cut holdings of corporate debt due in more than a year to the lowest level in almost a decade. Inventories soared to as high as $235 billion in October 2007, before dropping to as low as $40.4 billion on Feb. 22, Bloomberg data show.

Revenue from trading among the nine-largest U.S. and European investment banks, excluding accounting gains, dropped 16 percent to $120 billion in 2011 amid the escalating European sovereign-debt crisis, Bloomberg data show.

“Trading had a very poor year on Wall Street, so bonuses were down and so many people were cheaper than they would have been a year or two ago,” Johnson said. “We probably have not reached equilibrium yet because I don’t think anybody knows quite how the Dodd-Frank and the Volcker rules and all that, how that’s really going to shake out.”

Lenders will have two years to implement the Volcker rule as long as they make a “good faith” effort to comply with the ban on proprietary trading, U.S. regulators said April 19.

Dimon Lobbies

The Volcker rule “matters more” in credit markets “because transactions are typically over-the-counter,” said Roger Joseph, co-chair of financial services at law firm Bingham McCutchen LLP.

Chief executives from JPMorgan, Goldman Sachs and Bank of America -- three of the five biggest U.S. banks by assets -- lobbied the Fed on May 2 to soften proposed reforms that might crimp their profits, saying that new rules would harm financial markets.

JPMorgan Chief Executive Officer Jamie Dimon sent a 38-page letter to shareholders last month, saying that while he agrees with the Volcker rule’s intent to eliminate “pure” proprietary trading and ensure market-making won’t jeopardize banks, the rule must be written so that it doesn’t put U.S. banks at a global disadvantage.

“We cannot and should not be in a position where the rule affects U.S. banks outside the United States but not our foreign competition,” Dimon, 56, wrote.

London Whale

Along with its competitors, JPMorgan has shut groups in its investment bank that specialized in speculative bets with the company’s own money. At the same time, the bank has kept some of its biggest risk-takers in its chief investment office, with a team that has amassed as much as $200 billion in investments, booking a profit of $5 billion in 2010 alone, a former senior executive, who asked not to be identified because he wasn’t authorized to discuss the matter, said last month.

Bruno Iksil, a London-based trader for the group dubbed by some in the market as the London Whale, gained attention this year after moving credit derivatives with trades so large they distorted price relationships, market participants who asked not to be identified said last month.

Financial institutions also are adapting to higher capital requirements set by the Bank for International Settlements in Basel, Switzerland, and a slowdown in the global economy being fueled by Europe’s sovereign-debt crisis. Banks reduced employment by more than 120,000 worldwide last year, Bloomberg data show.

Eroded Volumes

While traders have historically headed for hedge funds with the hope of bigger paydays, Wall Street banks previously offered greater job security and a higher volume of business. That’s changed, said Gregory Cresci, an executive recruiter at Odyssey Search Partners in New York.

“A lot of these guys were sitting atop a mountain of trading volume and revenue, much of which has eroded beneath them,” he said. “So it’s logical that they decide to leave or are no longer needed.”

Silvetz, who joined Deutsche Bank in 2001, generated about $225 million in profit for the firm in 2009 with trades that included wagers American International Group, the insurer rescued by the U.S. government in 2008, was in better financial condition than its bonds suggested, according to people familiar with the situation who declined to comment because they weren’t authorized to discuss the trades.

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