Banker-versus-trader duel over on Wall Street
Picking the chief of an investment bank used to be a relatively straightforward process. By and large the business that made the most money got to put its man forward. So when trading profits ruled the day, the shirt-sleeved denizens of the desk won out over the pinstriped dispensers of financial advice — and vice versa when mergers and IPOs reeled in the big bucks. That relatively simple duel of thumb may, however, be a casualty of the recent crisis.
The past decade favored Wall Street executives with trading backgrounds. But that’s all supposed to change as a result of the recent U.S. financial regulation bill and looming changes to international capital standards. The so-called Volcker Rule, part of the law signed by President Barack Obama earlier this month, is supposed to put an end to U.S. banks trading for their own accounts.
Meanwhile, the Bank for International Settlements is expected to come up with more rigorous capital standards that will force banks to set aside more capital for riskier, proprietary trading oriented business — nudging them out of the activity. Put these two together and throw in a dose of post-crisis risk aversion, and it’s easy to see why the industry is prioritizing business lines that are focused on serving customers without leaving scads of precious capital in harm’s way.
That was the intent of changes like the one named for its architect, former Federal Reserve Chairman Paul Volcker. His vision of Wall Street harks back to a time when partnerships helped corporate clients raise capital and buy rivals, facilitated trades for institutions, and advised investors what do with their money.
Many firms are already heading (back) in that direction. Morgan Stanley, for example, is gearing up to take full control of Smith Barney, the stock brokerage it owns in conjunction with Citigroup. Citi, in turn, is scaling back trading for its own account and private equity activities and expanding its advisory businesses in emerging markets.
But in the new world of finance, none of this means that a trader’s sensibility is less relevant in the boardroom. Take Morgan Stanley, which is led by a former stockbroker and management consultant, James Gorman. In the firm’s second quarter, trading still brought in around 43 percent of its $8 billion in net revenue.
It’s hard to know how much of that will be affected by the various new rules. But suppose trading revenue at Morgan Stanley could fall by 30 percent from existing levels. All else being equal, a third of the company’s business would still come from trading — more than any other single business line.
Or look at Goldman Sachs. If income from its fixed-income, currencies and commodities trading arm were to shrink from the second-quarter’s already-depressed levels by nearly a third, the division would still account for more than 40 percent of the firm’s net revenue.
In short, even with the implementation of American financial reforms and new capital standards, Wall Street banks will still depend heavily on trading. While they may be better at offloading the risks, and obliged to set more money aside to absorb them, the executives who lead the firms will have to understand the trading business.
That doesn’t mean traders are the only option to run big banks. After all, ex-traders have met with decidedly mixed success running the show. To name but two, Dick Fuld rose from the commercial paper desk to the top of Lehman Brothers, and former trading floor habitue Jimmy Cayne presided over fatal mistakes at Bear Stearns.
Rather, things have become very complicated. Chief executives of banks today must be more than simply experienced traders or bankers with ambition and a smattering of leadership skills. They must be astute risk managers who can grasp all the different business lines while also overseeing strategic and legal changes — and for good measure inspiring the troops and deftly handling regulators, shareholders and the press.
The idea of traders battling bankers for the top job seems as quaint as Volcker’s world of partnerships. If a financial firm is lucky enough to find someone capable of everything required, his or her background shouldn’t matter.