Cast your mind back to the 2019/2020 bonus season. Despite happening pre-COVID, it wasn’t exactly 'halcyon days': at Deutsche Bank the average bonus was held steady, but there was pain at the top – material risk takers (many of whom are traders) had their bonuses cut by around 17%.
That experience may be coming back to bite. Burned by a bonus round when Deutsche's credit traders saw their pay eroded by poor performance in the rates and FX trading businesses, Business Insider reports that some traders at Deutsche Bank in the U.S. are leaving: BI suggests that 25% of Deutsche's Americas distressed credit traders alone have gone so far.
The list of exits contains some illustrious names. On it are: Matt Weinstein, Deutsche Bank's former head of U.S. distressed credit trading, who went to Morgan Stanley; Chad Flick, who went to Soros Fund Management; Jeff Chang, the co-head of U.S. high yield trading, who went to Bank of America; Seda Arca who went to JPMorgan; and Steve Feinberg, head of investment grade credit trading, who resigned recently and has yet to resurface.
Deutsche isn't commenting on the U.S. leavers, which come after the German bank also made some big hires (eg. Mark DeSplinter joined from Citi in June to run US index and single-name credit-default swap trading). However, the departures might be expected to focus executive minds, particularly when it comes to judging compensation for 2020/2021. With most credit traders again having a good year, traders will again expect to be paid. And this time, their disappointment risks being even more acute.
The expectations gap is not restricted to Deutsche Bank. If there's anything designed to defuse bullishness about compensation, it's the fact that - as the Financial Times points out - European banks are currently trading at only 40% of the value of their assets. As the pandemic persists, investors are in other words expecting substantial writedowns on loan books. However hard and however successfully traders trade, gravity from the real economy is pulling bonuses in the wrong direction.
With most banks expected to make substantial writedowns in the second half, this might let individual banks off the hook. - Deutsche Bank's traders can hardly complain about lower bonuses if other banks are paying less too. However, banks aren't the only ones in the market for trading talent: hedge funds are waiting on the sidelines to pick-off the best people. As 2020 goes on, banks will be forced to make a choice: keep their traders happy, or risk a rerun of this year's Deutsche U.S. credit experience as their best traders leave for big hedge funds in 2021.
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