Morning Coffee: These are the worst banks to work for if there’s a meltdown. Private equity funds only want to hire fundraising and marketing people
If you work on a trading floor and your boss is old enough to remember 2008, then it’s likely you’ve been warned more than once never to utter the words “worst case scenario”. The phrase gathered something of a bad reputation during the last big crisis, as bankers and politicians tended to proliferate worst case scenarios, nearly all of which ended up being more optimistic than what actually happened. Not only that, but there was a terrible tendency for the markets to make fools of everyone, by delivering real world results in which the largest losses came from things everyone had assumed to be safe.
There’s a similar sense to the Federal Reserve stress tests published last night. They show the potential for losses of a total of $541bn, across 23 large banks. That sounds like a huge number, but it’s actually only $23.5bn per bank on average, and all the banks tested would remain above their minimum capital levels. So no bank failed, meaning that although the assumptions must have looked quite strict when they were being made (unemployment of 10%, commercial real estate prices down 40%, short term interest rates back to zero), the Fed has come up with a “worst case scenario” that’s not quite as bad for the banking system as “three months ago”.
In fairness to the Fed, they are relatively modest in the claims made for their exercise – it was never meant to be more than “one way to measure strength”, and they’re going to “remain humble about how risks can arise”. With those caveats in mind, though, there are some clear patterns to the results, showing which banks might be most vulnerable if the scenarios worsen.
The most obvious outliers are Deutsche, and UBS/Credit Suisse. The results here don’t refer to the whole banks, but rather to their US-regulated subsidiaries. These are the New York offices of European banks that would be in most danger if the US goes into a tailspin. There’s also a clue from the makeup of the projected losses; $94bn come from trading business but $424bn from bad loans.
Taken together, it’s possible to surmise that the worst impacts from this scenario would be related to real estate business; it’s notable that Barclays' US operations, which have always been more reluctant to play in that market, are significantly less exposed than other non-US banks. For what it’s worth, Goldman Sachs and Morgan Stanley come out worst from the stress test among the domestic bulge bracket.
What might be a lot more worrying, though, is that as well as their main “worst case scenario”, the Fed also asked banks to consider the effect of an environment with “persistently high inflation necessitating steep interest rates”, and the results were almost as bad as the recession - $80bn of trading losses. And isn’t that quite similar to what we’ve actually got now?
Elsewhere, the private equity labour market has so far been right up there with cockroaches and Keith Richards, in terms of its ability to continue to thrive. Even in an extraordinary deal drought, headhunters specialised in the industry are only saying that “while the pace of hiring has slowed from last year, it remains strong by historical standards”. But it seems like the kind of people being given offers might have changed a lot.
A couple of years ago, the PE firms mainly needed warm bodies with execution skills, and firms which overextended in that direction do seem to be having layoffs. But they still need fundraising and marketing executives, particularly ones with experience and contacts in the Middle East. There are also the countercyclical hires – restructuring and distressed specialists are well bid – and the move into private credit has meant that a lot of houses with new credit funds to invest are also still hiring. It takes more than a deal drought to kill the industry.
Meanwhile ...
What do you call and LBO without the leverage? Tech sector private equity firm Silver Lake Capital is adapting to the new environment by accepting that it’s not going to do a lot of deals, but going for “all-in” opportunities with much lower debt gearing. (FT)
If you’re looking to spend this year’s $2m bonus and you’re prepared to become a human guinea pig for every treatment going, it’s apparently possible to aspire to having “the brain (?), heart, lungs, liver, kidneys, tendons, skin, hair, bladder, penis and rectum of an 18-year-old.” (Bloomberg)
Someone is being investigated for allegedly having hacked the email of an assistant to a former Morgan Stanley executive, and found enough information in there to get themselves investigated for insider dealing. Morgan Stanley themselves haven’t been accused of wrongdoing and seemingly play no part in this slightly bizarre scandal, which illustrates the reason why banks are so keen on preserving records. (WSJ)
After having previously been told that they need to pay junior staff more if they are to have any hope of attracting and retaining people in the audit profession, the accountants are now remembering that it’s “a challenging market”. PwC have been given the bad news that due to headcount increases during the deals boom, bonuses will be lower and pay rises below inflation. (Financial News)
If you can’t handle him at his worst, you don’t deserve him at his best – investors in Pierre Andurand’s funds are aware that looking at their performance figures is a bit like having a high-drama friend. The Andurand Commodities Discretionary Enhanced Fund is down 51% this year, after having increased sevenfold over the previous three. (Bloomberg)
Although by any normal measure, Microsoft Excel would be considered the most mundane piece of software ever written, it’s always had a zany, creative, even whimsical streak. (WIRED)
Presumably there’s an equivalent of the proverb “it’s an ill wind that blows nobody any good” for droughts – hedge funds which paid up to hire weather forecasting quants over the last year will be cashing in as unusually dry conditions in the USA have sent agricultural commodities soaring. (Bloomberg)
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