Macaskill on markets: Fortress Defiant


Jon Macaskill
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The doubling of Lloyd Blankfein’s bonus for 2012 and the halving of Jamie Dimon’s payout was a sign of a return of the natural order of things on Wall Street. Goldman Sachs’s CEO Blankfein was rewarded for a year when the bank finally seemed to get its mojo back, while JPMorgan CEO Dimon was punished – fairly lightly – for his failure to deal with a monumental risk-management blunder in the form of the London Whale credit derivatives trading loss of over $6 billion.

JPMorgan still managed to comfortably beat its peers in total investment banking revenue during 2012, despite its self-inflicted trading wound, which was a testament to the resilience of its underlying franchise.

But the epic trading disaster undermined the narrative of market share gains and increasing global domination of investment banking revenue at JPMorgan. It also turned the bank that relentlessly touts its ‘fortress balance sheet’ into Fortress Defiant, at least at the top, where Dimon seemed increasingly exasperated by the attention paid to the London Whale losses and the fallout from his ill-judged decision to dismiss the problem as a "tempest in a tea-pot".

Dimon’s reorganization of staff in the wake of the losses made by his chief investment office had the convenient side effect of leaving JPMorgan without a qualified potential internal successor to the CEO. Investment banking head Jes Staley could have stepped up if required, but he was publicly sidelined by Dimon after the CIO losses and left JPMorgan for the more comfortable berth of a partnership at hedge fund BlueMountain Capital in January. BlueMountain was a leading beneficiary of the initial forced unwinding of the London Whale positions by JPMorgan and generated more income from helping the bank to put together some of its later CIO deal reversals, so the irony of Staley’s choice of a haven after three decades at JPMorgan was lost on few.

The management structure of the bank he left behind is clearly still a work in progress. An odd set-up that had CFO Doug Braunstein (another fall-guy for the CIO trading losses) reporting to co-chief operating officer Matt Zames was abandoned when Dimon finally settled on a new CFO in the form of Marianne Lake in November. Zames still faces a period of potentially confusing interaction with the two new co-CEOs of the corporate and investment bank at JPMorgan: Michael Cavanagh and Daniel Pinto. Zames started 2012 as one of two global co-heads of fixed income, along with Pinto. The elevation of Zames was sudden and pronounced, and his remit has widened from when he was best known for running the leading global rates trading franchise for JPMorgan. Zames developed a reputation within the firm as an abrasive manager as he made the transition from a top-performing interest rate swap trader to broader executive responsibility. He was a junior trader at Long-Term Capital Management when the hedge fund blew up in 1998 and seems to have drawn some valuable lessons on crisis management from the experience.

Zames certainly impressed Dimon when he was asked to take a lead role in unwinding the CIO trading loss, and his direct manner helped to push JPMorgan to its current position as clear leader in global fixed-income trading revenue. Zames clearly prefers to let his numbers do the talking, which is characteristic of a trader, but his previous apparent lack of interest in promoting the progress made by JPMorgan might prove to be something of a liability now that he has a broader remit.

JPMorgan has historically shown little interest in getting out client votes for fixed-income industry polls such as those conducted by consultancy Greenwich Associates, which leads to rankings that do not reflect its revenues or real market share. Greenwich polls consistently rank Barclays and Deutsche Bank well above JPMorgan in fixed income, for example, even in the US, which is not reflected in revenue at the respective banks.

A recent decision by JPMorgan to withdraw from participation in the annual Euromoney foreign exchange industry polling can be interpreted as storming off in a huff by a bank disappointed at its ranking of sixth in the 2012 survey. The move has a definite echo of Dimon’s wearing us-against-the-world tone and sets a strange note of petulance from a bank that is still performing very strongly on most criteria, with record full-year 2012 income of $21.3 billion on revenue of $99.9 billion, and retention of its number-one ranking for global investment banking fees.

Goldman Sachs had lower full-year earnings of $7.48 billion on revenue of $34.16 billion, but its fourth-quarter results provided a substantial surprise to the upside, unlike those at JPMorgan, which were solid but unexceptional. Equity revenues were especially strong, which helped Goldman to record an increase in overall sales and trading revenue compared with 2011, unlike many other banks.

Revenues of almost $2 billion during the fourth quarter for the firm’s investing and lending unit indicated that Goldman will be able to continue making money from proprietary position taking in the post-Volcker Rule environment, which dictates that bets by banks have to be maintained on a long-term basis.

Goldman has been cautious about its risk exposure in the past couple of years while it weathered the storm created by market and regulatory uncertainty and its own many reputational issues. It has not backed away from its traditional willingness to take big positions when senior executives buy into an investment idea, however. And nor is it avoiding areas of potential controversy simply because they seem like an unlikely fit for a modern investment bank.

One of the factors driving its strong fourth-quarter equities performance was revenue from reinsurance trades, for example. Goldman disclosed for the first time in January that reinsurance accounted for $1.08 billion of its $8.21 billion of full-year 2012 equities revenues. It did not provide any further information on what this reinsurance revenue comprised, but trades via reinsurance vehicles in lightly regulated regimes such as Bermuda were abandoned by most other banks some years ago.

Although Goldman is still willing to push the envelope when it sees a sustainable revenue stream, it dodged the two main reputational disasters of 2012 – involvement in the Libor scandals, where it was not a rate provider; and winning the mandate for the Facebook IPO, which proved to be a disaster for Morgan Stanley. This must have been a refreshing change for Goldman staff at all levels, including the beleaguered management team of CEO Blankfein and president Gary Cohn.

The sharp fall of over 4% in Goldman’s compensation ratio as a portion of revenue to just under 38% for 2012 indicates that not all employees will have celebrated the bank’s return to form. Some equity employees are said to have reacted badly to their bonus details after delivering strong performance, for example. But you can’t please all of the people all of the time, and Goldman increased its overall pay per employee over the year by trimming staff, which maintained its position as the investment bank where staff have the best individual earnings prospects.