In the five years that John Silvetz made about $700 million for Deutsche Bank AG (DBK) by trading corporate bonds and credit derivatives, the amount 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 declined to be identified because they’re not 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, according to Bloomberg report.
“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 (BARC), 100,000 euros ($131,000) at Frankfurt-based Deutsche Bank and $125,000 at Morgan Stanley (MS) in New York, according to data compiled by Bloomberg. For some at Charlotte, North Carolina-based Bank of America Corp. (BAC), 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.