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Morning Coffee: Bank of America traders are having their best Christmas ever. What Wall Street CEOs already hate about 2024

“It’s the most wonderful time of the year (against a very undemanding base for comparison”.  Although investment banks, by and large, do not party like they used to, the festive season still means a lot more socialising, difficulty getting calendars in sync and an unwillingness on the part of clients to do anything that might complicate their year end.  Consequently, December is a month in which, notoriously, not much happens.

And that means that by the end of November, senior management has a pretty good idea of what the full quarter (and therefore the year) is going to look like, so statements like Brian Moynihan’s at the Goldman Sachs conference can be taken seriously – Bank of America’s investment banking fees will be down in single digit percentage for Q4 (itself probably better than the Street), but Moynihan says the trading business is on track for “probably the best fourth quarter we’ve ever had”.

This is partly because overall trading conditions have been relatively benign compared to the rest of the year – at Goldman Sachs, CFO Denis Coleman said revenues are flat year-on-year.  But Bank of America will also, understandably, see it as a vindication of its strategy of allocating more capital and hiring top people to its trading business in the belief that there was market share for the taking.  Global head of trading Jim DeMare, in particular, looks like he was absolutely right to lose his temper last year and demand that everyone either raise their expectations or quit.

At the same time, the advisory and capital markets bankers continue to tick over, hope for a better 2024 and spend December wondering if anyone might hire them to work in private credit.  John Weinberg of Evercore seemed to be expressing the consensus view at the Goldman conference – “the market is ready, the companies are ready, and the question is when the starting gun goes off”.  Or, expressed slightly more cynically, “No board wants to announce a deal and see their stock get crushed”. 

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So what the investment bankers need is a bit of political stability, clarity about the interest rate cycle and a strong equity market.  Which are all the same things that the traders want, too.  For the moment, it looks as if the industry cycle has turned and that for the immediate future, sales and trading divisions will be driving the revenues.  That could make it more difficult, in the context of a bonus season which is already likely to be fraught, for heads of capital markets and M&A teams to argue that their pools need to be topped up with transfers from trading revenue in order to invest in the franchise.

For the time being, though, and in the knowledge that every morning brings a new trading day on which anything can happen in the markets, it looks as if top traders at BoA have more reason than anyone else to view the end of the year with optimism.

Elsewhere, the Federal Reserve clearly has Wall Street CEOs rattled with its proposals for new capital requirements.  The USA’s implementation of the latest version of the Basel Accords is significantly tougher than the version proposed for Europe, and both Jamie Dimon and David Solomon absolutely hate it.  According to Dimon, it will “unjustifiably and unnecessarily increase capital requirements by 20-25% for the largest banks” and “create even more risk in the financial system”.  Solomon, on the other hand, thinks it will “result in higher borrowing costs for clients such as manufacturers, food producers and pension funds”.

The new rule is only a proposal for consultation – James Gorman of Morgan Stanley has rather more calmly said that he hopes the Fed “will be open to changes”.  But, although the new rules would not be implemented for a couple of years and have a long transition period, they are going to start casting a pall over planning as early as next year.  If there is any chance that the regulators are going to require more retained earnings in the future, a prudent bank can’t pay them out as dividends now.

This is bad for all the US bank CEOs, but particularly for Solomon and Dimon.  One of them would prefer to pay bigger dividends to keep shareholders happy about his strategic plan, and the other would prefer to pay big dividends on JP Morgan shares simply because he owns so many of them.  We can expect a lot more complaining about this issue in 2024.

Meanwhile …

Peter Orszag of Lazard has said that he plans to keep growing, and that the firm will be hiring ten Managing Directors a year to drive the new strategy.  Which sounds impressive, until you remember that Jefferies has been doing literally ten times that growth rate over the last couple of years. (Bloomberg)

The phrase “activist nuns in Nevada” is intrinsically funny, but someone on an investment banking defence team has quite probably had to put together a dossier on the Adrian Dominican Sisters, Sisters of Bon Secours USA and other groups who have launched a shareholder lawsuit against Smith & Wesson. (WSJ)

One consequence of major Wall Street figures having withdrawn support for Harvard and other elite universities over student protests about Israel is that the “donor door” for getting your kids into the Ivy League is much cheaper this year. (NY Post)

Showing exactly what kind of a hedge fund manager he might have been, Kwasi Kwarteng has looked back on his budget from a year ago and concluded, on balance, that he was right and the bond market was wrong. (FT Alphaville)

Credit Suisse used to be famous for sponsoring the Swiss national football team and Roger Federer.  Now that the one-time national hero has left the global scene – and Federer has also retired – it’s fallen to UBS to pick up the branding.  Luckily for Team Switzerland, Sergio Ermotti is a big sports fan who had originally intended to be a professional soccer player. (Bloomberg)

Deutsche Bank has taken advantage of quiet conditions in Australia to rebuild its local franchise.  Some of the new hires note that one advantage their new employer brings is a global network of Aussie Deutsche bankers in roles across the world. (AFR)

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AUTHORDaniel Davies Insider Comment

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