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Morning Coffee: Why Bank of America doesn't mind losing sometimes. Fear, fun and chaos in the crazy world of quant headhunting

A surprising number of seemingly unrelated fields have a similar proverb – it’s the notes that you don’t play which make a jazz solo. The hands that you don’t bet on are the ones that drive the flow of money at the poker table.  And the balls that you don’t swing at will determine your long term performance as a baseball hitter.  According to a profile of Bank of America CEO Brian Moynihan, it’s true in banking too. Moynihan has spent years trying to engrain a culture in which the deals that you don’t get are as important as the ones which you do.

At BoA, they apparently call it “responsible growth”, the idea being that someone has to ensure that the instincts of aggressive bankers are reined in, and deals which might be excessively risky are passed by, even if this means losing the business to the competition and thereby missing out on the top league table places.  The idea seems to be that there’s a kind of “winner’s curse” in a competitive industry – since deals go to the most aggressive player rather than the smartest, being the runaway number one in market share is usually an indication that you’re writing bad business.

With hung deals in the leveraged loan market overshadowing the year-end results, people today are likely to be significantly more receptive to this kind of sermon than they would have been a year ago.  But there’s a real question here, and it speaks to the core strategic direction of a number of big banks.

The dilemma for a publicly owned investment bank is that your shareholders like profits, but they don’t like risk.  Generating stable and consistent earnings from a volatile and cyclical industry is basically impossible.  So what do you do?  David Solomon’s Goldman Sachs has been wrestling with this question for years; trying to develop more stable revenue sources to tame the volatility of revenues was the basis for the “Operation Main Street” project that’s dominated the Goldman story for the last five years.

At Goldman, that project appears to be reducing its scope and ambitions; the Marcus brand is likely to see significant layoffs in the New Year and Goldman now seems to want to provide the back end while letting Apple take care of the consumer-facing business.  It’s interesting that Bank of America, which is hardly lacking in retail and payments revenues, still thinks that the way to tame investment banking is simply to take less risk.

On the other hand, maybe the real lesson here is that banks should be proud of what they are and lean in to it.  Although the Moynihan profile is full of praise from analysts and endorsements from Warren Buffet, it does acknowledge that BoA hasn’t actually seen any benefit in share price terms from its safety-first strategy.  It could be that the correct thing for banks like Goldman to do is just embrace the feast-and-famine nature of investment banking, keep sufficient capital and a flexible cost base, and try to find some shareholders with strong nerves.

Elsewhere, as Alex Morrell of Business Insider puts it, “No special education or accreditation is required to run [a headhunting firm], and the overhead is minimal. As a result, the caliber and culture of such firms can vary dramatically”.  Never was anything so true, or so diplomatically understated, said about this widely misunderstood and not always popular industry.

The context is a scandal at Durlston Partners, a rapidly growing London-based firm that’s just opened up on Wall Street.  It’s also recently parted company with its head of data science recruitment, and the ensuing quarrels have dragged out dirty linen in quantities usually only seen in student residences at the end of term.

There is … quite a lot … in the article.  Most of the key allegations are denied, except the ones that are supported by text and WhatsApp evidence, which are “deeply regretted” by Vax Bahram, the owner of Durlston.  There are so many of them that it’s almost impossible to summarise, but along with the accusations of atrocious behaviour and language, there’s a picture drawn of an aggressive work and party culture that looks like a parody of the worst excesses of the Street itself.  Which may be the underlying truth; recruiters tend to see a subset of the industry’s workers, and to meet them only during periods of extreme stress.  They might get a distorted picture of what bankers are really like.

Meanwhile …

A mutiny is brewing at Goldman Sachs over bonuses that could be at their lowest for a decade. "It all goes back to bad decision making and spending that got out of control." (Business Insider) 

Credit Suisse wants to set the record straight on Swiss investment banking league tables; there were suggestions that CS had lost the top slot in its home market, but CS has challenged this.  As the article points out, it is rarely a good use of time to adjudicate between different bankers as to the current use of Dealogic data. (Finews)

Unusually in a mid-office rather than front office context, the Chief Risk Officer of Santander UK’s investment bank is under investigation for allegations of bullying and inappropriate jokes. (Reuters)

“Instead of learning from what’s worked (or not) elsewhere, City firms have tended to adopt playbooks that have been tried, tested and — sometimes — found to fail.” (Financial News)

A year-end story at JPM showing what a difficult and uncertain business credit trading is; some positions have been written down after Gianfranco Canepa left to join a hedge fund, but nobody is alleging wrongdoing, even the counterparties who first suggested JPM’s marks were different from the Street. It’s just something that happens in illiquid markets, seemingly. (Bloomberg)

The past two official ethics advisors to the British Prime Minister have resigned in protest, but Rishi Sunak and Sir Magnus Laurie (of Evercore) are hoping that the Boris Johnson years are behind them. (City AM)

Caroline Ellison and Gary Wang (the CEO of Alameda Research and the co-founder of FTX) have signed plea deals, with the announcement made immediately after Sam Bankman-Fried got on the extradition plane.  There might not be much to claim from the SEC whistleblower program this time though. (Financial News)

The 63-year-old Guggenheim chief investment officer died of a heart attack during a workout. (Bloomberg) 

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