Macaskill on markets: FICC sales and trading stars bring baggage

Jon Macaskill is one of the leading capital markets and derivatives journalists, with over 20 years’ experience covering financial markets from London and New York. Most recently he worked at one of the biggest global investment banks

To what extent does the success of a FICC franchise depend on its managers? It clearly does not hurt market leader Goldman Sachs that chief executive Lloyd Blankfeinand president Gary Cohn both rose from a FICC background. Goldman has plenty of high-performing talent still embedded in FICC, often in the form of surprisingly young managers. Blankfein’s disclosed bonus and a firm-wide total payout of $21 billion or more will dominate headlines when Goldman announces full-year results in January. But FICC stars such as Ed Eisler and Ashok Varadhan can expect eye-popping bonuses that they will attempt to keep under the radar. Even if bonuses are closer to 40% of revenue than the old industry standard of 50%, there will still be about $10 billion of FICC compensation to share out. Eisler and Varadhan parlayed former jobs as swap traders then heads of rates in Europe and North America, respectively, into positions at the top of the Goldman tree while still in their 30s. Eisler is currently one of four global securities co-heads while Varadhan has moved to a role running currencies and emerging markets debt.

Their old boss, Tom Montag, is now head of corporate and investment banking at Bank of America. The tumult at the top of BofA has diverted attention from Montag’s remit to revive and improve the old Merrill Lynch franchise, but recent FICC comings and goings on his watch underline the problems facing sales and trading managers. When Antonio Polverino swapped his role as head of EMEA FICC sales at BofA for the same position at RBS, he was replaced by Sanaz Zaimi, former co-head of European structuring at Goldman. These moves garnered multi-million dollar bonus guarantees for the duo while adding to the fixed-cost base at their new employers.

Appointments such as these also highlight the extent to which new FICC models supposedly based on liquid flow markets rely on staff with a background in structuring. Both Polverino and Zaimi worked almost exclusively as structurers before taking on their current broader FICC sales roles. A similar dynamic is at work elsewhere. Rajeev Misra, who joined UBS this year as head of credit, supervised flow trading along with a range of other businesses when he held the same role at Deutsche Bank. But the focus for much of his career was on structured credit.

There are also risks of personality clashes when highly experienced staff are recruited as part of a drive for growth. When Morgan Stanley hired Jack DiMaio as head of interest rate, credit and currency trading in July rivals predicted that the CSFB veteran might chafe at reporting to Morgan Stanley sales and trading head Mitch Petrick, given their comparable backgrounds.

Compensation could become a sore point at many firms if 2010 fails to turn into the FICC bonanza that many bank heads seem to be expecting. Newly hired recruits typically come with bonus guarantees, which can cause tension with existing employees who are more exposed to near-term performance.

Bank chief executives would like to gradually push down the proportion of revenue retained by investment banking staff, but this is difficult in a competitive hiring market.

One of the many surprising aspects of the decision by JPMorgan chief executive Jamie Dimon to fire investment banking co-head Bill Winters in September was the way it reduced Dimon’s leverage in containing compensation. Winters could have helped to restrain bonus levels for sales and trading staff he directly managed and had often nurtured. His successor, Jes Staley, is in a much weaker position, as he is attempting to win the confidence of employees who were often Winters loyalists just as compensation discussions begin.

Matt Zames was promoted from running rates and FX to co-head of fixed income soon after Staley took over, which might signal that he is accommodating the new regime. But other FICC staff can be expected to try to use the threat that they might join Winters in a new venture to push for high payouts.

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