Morning Coffee: Banking bonuses suffer from large unrealized loss syndrome. Bank of America starts moving people around
Maybe it was a good thing to be paid in cash last year, even if it was the sort of cash that can be clawed back if you leave within a specified time period. Yesterday's 7% decline in the KBW Index of bank stocks was a reminder that if you're paid in deferred stock, your already small bonus may wither further at the hands of the market.
Share prices in major banks fell more yesterday than at any time since the panic at the start of the pandemic. The decline was prompted by an appreciation that, as rates rise and bond prices fall, banks stand to lose money on their bond portfolios and in particular on all the Treasuries they bought with excess customer deposits while times were good. This in turn was presaged by a bank that's done just that - Silicon Valley Bank (SVB) revealed on Wednesday that it had lost $1.8bn after selling a securities portfolio worth $12bn to cover a recent decline in customer deposits.
Big banks aren't in the same position, but the travails of SVB - whose share price plummeted 60% yesterday, has focused minds on 'What if?' scenarios. In a normal situation, banks don't have to crystallize the losses on the bonds they're holding (which are simply registered as 'fair-market value of its held-to-maturity debt' on their balance sheets). But if banks need to sell some of their bond portfolios to compensate for customer withdrawals, those unrealized losses become real. And they are potentially very big indeed: JPMorgan has more than $10bn of unrealized losses on securities it classifies as available for sale; the banking industry as a whole has more than $600bn.
This is why JPMorgan shares fell 5.4% yesterday, along with those of America's other big deposit-taking banks. As banks chase deposits as a safe form of funding, it's a reminder that deposit-taking isn't as simple as it seems. It's also a reminder that deferred bonuses paid to bankers and traders are susceptible to broad macro trends and consumer health. With rate rises now back on the table, the hope will be that consumers don't withdraw more deposits, that more unrealized losses don't become realized as a result, and that the $600bn doesn't turn into the sort of writedowns that have caused problems, not just for stock and bonuses, but for banking jobs and the whole banking industry, in the past.
Separately, now that Bank of America has a hiring freeze and isn't really recruiting except for urgent staff in urgent areas, it's doing the inevitable thing and shunting existing staff into vacant positions instead.
For the moment, those positions are semi-tangential. Bloomberg reports that BofA is moving M&A bankers who usually work on big deals into jobs where they'll be working on smaller mid-market deals instead. However, it's not unheard of for banks to move people into less tangential jobs in the middle and back office and it's not only BofA that may be tempted to do so - Goldman isn't planning to make many external hires this year either.
SVB sold nearly all of the securities it held that were available for sale: around $21bn. It will take an $1.8bn after-tax loss on that. It's also raising $2.25bn in additional capital, which is more than the $1.8bn loss and suggests shareholder dilution as a result of losses on the bond portfolio. (FT Alphaville)
Silvergate Bank has gone into voluntary liquidation. (Finextra)
Nomura hired eight new FX professionals including Ben Robson to head electronic FX sales in London and Sarah Sparke for real money FX sales. (Bloomberg)
Banks and brokers are planning to hire people in electronic equities trading jobs. (Bloomberg)
Citadel Securities, IMC Trading BV and Optiver BV are paying graduates $400k in Sydney. (Bloomberg)
Credit Suisse shares fell more than 5% after the market opened yesterday when the bank revealed that it would be delaying the release of its annual report following a call from the SEC querying its cashflow statements dating back to 2019. (Financial Times)
Former HSBC and West LB banker Dan Oakes died in his sleep, aged 50. (Euromoney)
Barclays hasn't updated its public position on Jes Staley since he stepped down in November 2021, when it noted his “real commitment and skill” at running the bank. (Bloomberg)
Ex-Goldman Sachs banker Roger Ng was sentenced to 10 years in prison despite attempts by a Buddhist Monk to say that he's a “very good person” with a “very good heart." (Financial Times)
“He was motivated by the glory of bringing in the biggest deals that Goldman had ever done in Asia, by the prospect of advancing within the bank and by pure greed,” said the judge of Ng. (WSJ)
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