In the days before I worked in banking, I rather naively imagined banks to be monoliths – the distinctions between what various departments did, or the differences between the various roles within them, was unclear. Even when I started working in the City and the true picture came into focus, it came as a surprise to me that everyone didn’t just get on. It was a little like my childhood shock when I found, around the age of ten or so, that some adults didn’t like each other – I had previously assumed that ‘adults’ was just a homogenous, fun-spoiling block.
As a junior employee in Merrill Lynch’s FX department in the early 1990s, the first and most obvious crack in the monolith that I saw was the somewhat prickly relationship between traders and salespeople. Disputes were regular and, usually, conducted at window-shatteringly high volume across the floor. Sales would nag about the speed of getting prices and – monotonously, or so we traders thought – about spreads. Traders, in return, would bitch constantly about customers who didn’t deal or those who would run us over with large, ‘unfriendly’ flows.
That these disputes arose at all I now see as inevitable given two weaknesses in the way banks worked: first, that rewards and incentives were disjointed – traders got paid on profits in their books, salespeople on ‘production credits’ linked to volume. Second, that there was very little way of curing this disjoint – given the manual nature of the dealing process, ‘tying back’ credits to profits was well nigh impossible.
As a result, rather than rational discussions of how to maximize profitability for the bank, arguments went along the rather depressing, pantomime lines of: “your prices are shit”; “no they’re not”. There was little way forward from this impasse, although a trading colleague of mine did once end a similar exchange by head-butting the salesman in question and breaking his nose.
Inconsistent rewards
This central problem of inconsistent rewards and incentives is, I believe behind a great many of the rivalries and tensions that occurred, and still occur within banks. Take, for example, the general antipathy between the staff within customer-facing businesses and those who traded ‘prop’ (an almost extinct breed these days post-Volker in banks, I admit). Prop folk were seen as having full access to the ‘trader’s option’ (i.e. swing hard and rejoice if you win; shrug or get a new job if not). Nothing annoyed a flow trader – buried under a blizzard of customer requests – like seeing his prop colleague lounging around nonchalantly.
On a wider scale, poorly conceived approaches by senior management to the allocation of pay and promotions between departments (as well as allocation of resources like access to new hiring slots or money for IT spend) can lead to much more serious tensions. What is being rewarded? Pure revenues? Net profits? Return on equity? Growth? The answers to these questions have always skewed – and still skew today – behaviour to an extreme extent. Bad metrics lead to bad behaviour.
For example, a blithe disregard for skyrocketing leverage and a desire for raw revenue growth were widespread in banks in the first few years of this century. Balance sheets ballooned. Complex, high margin derivative business was pursued aggressively. Profits were generated by long-dated deals being marked-to-model rather than by short-dated deals generating actual cash flows. As is now clear with hindsight, one eventual consequence of this was the crisis of 2007/8.
A more subtle consequence was increased rivalry and tension between departments. It was difficult, as someone in a department like FX, say, with a flow model that required only a limited call on a bank’s balance sheet and which generated consistent, ‘cash flow’ profits, to look at the senior managerial love (not to mention bonus dollars) being poured on, let’s say, structured credit, without a severe case of lockjaw from permanently gritted teeth.
I’ve never traded equities (a business in many ways similar to FX) but I know for a fact that the lockjaw extended to that floor, too. “If I hear credit go on about how brilliant they are just one more time”, a friend of mine in equities once complained, “I’m going to get the lift down there and clock someone”. Happily for his continuing employment, he desisted.
The problem with rivalries
Did this rivalry really matter? In my view: yes. Just as permanent disputes and bitching between flow traders, prop traders and salespeople reduces the effectiveness of a department, inter-departmental disputes weaken a bank. Energy is expended in non-productive ways. Gaming the system becomes widespread. An inward looking mentality forms in each business unit: this means that the bank-wide teamwork needed to assess risk correctly isn’t present.
So what is the solution? At the level of trading versus sales, I think the answer is relatively straightforward: to eliminate to the greatest extent possible any gap between the measurement of sales and trading performance. Production credits should be tied back to actual profits (a task made much easier by the electronic capture of the details of trades and the ability to track their profitability in time). All this needs to be backed up by constant dialog between salespeople, traders and their managers – both formally and informally – to avoid fruitless pantomime arguments (and head-butts) and replace them with rational, cool-headed and team-oriented assessment of what is best for the business.
Likewise, on a larger scale, the task for senior management is to do a similar thing for the cooperation between departments – a task made more vital by the severe pressure banks are under. A sensible and universally agreed and applied set of goals (always based on sustainable risk/return) needs to be created. Transparent measurement must be in place to avoid gaming. Above all, a collegiate, not antagonistic, environment for business leaders is required; possibly even a compensation scheme for MDs that rewards them – at least in significant part – on the performance of all departments, not just their own. A type of partnership, in other words. To some extent this is the model at the world’s best performing investment bank Goldman Sachs. What is for sure is that a pure policy of ‘eat what you kill’ and the resultant internal distrust and rivalry isn’t a model that has a great track record.
Kevin Rodgers started his career as a trader in 1990 with Merrill Lynch in London before joining another American bank, Bankers Trust. From there he went on to work as a managing director of Deutsche Bank for 15 years, latterly as global head of foreign exchange. His book, “Why Aren’t They Shouting?: A Banker’s Tale of Change, Computers and Perpetual Crisis” was published by Penguin Random House in July 2016.
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