Morning Coffee: Morgan Stanley’s boss and the bonuses that “horrify” parents. Goldman Sachs' employee surveillance plan

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Among the adjectives people have used to describe the annual banking bonus round, “horrific” has been unfortunately common over the past few years. But in an interview with the Australian Financial Review, Colm Kelleher of Morgan Stanley says that he wants to be able to pay bonuses that are horrifying – but in a good way.

The point is that, according to Kelleher, the levels of compensation paid to top performers in investment banking are always going to seem excessive to people outside the industry; he recalled telling his father about his first bonus as a young banker in London and being surprised to find out that dad Kelleher was appalled rather than pleased to find his son was getting several multiples of a country doctor’s salary. And given that this is inevitable, it hardly makes a difference to the man in the street whether the top bankers are getting $1m or $5m.

What makes a big difference to Morgan Stanley, though, is whether the remuneration is handed out as a variable bonus or built into fixed salary. “One of the silly things that came out of the crisis was this idea that bonuses are bad, and the result was that in my European operations I basically trebled the salaries of my people”, Kelleher said, noting that this is not good for shareholders and that the lack of cost flexibility makes the business more risky, not less.

Of course, the reason why the regulators took against bonuses was that they believed that high pay with high gearing to revenue generation tended to create perverse incentives and incline the employees to take excessive risks or to mis-sell products to customers. Kelleher recognizes the issue here, but suggests that a more nuanced view of the relationship between pay and incentives is needed.  It’s one thing to make sure that bonuses are not simply linked to the top line with no consideration of cost or risk to the bank. It’s quite another to try and second guess the judgment of employees about what risks to take. If the bank – or its regulators – is always looking back, twelve months after a market has crashed, suggesting that everyone should have predicted this, then people are not going to take risks at all, to the detriment of everyone involved.

It’s very interesting to see a senior opinion leader in the industry finally challenge the consensus on bonuses, and even make a full-throated statement of support for practices like “cross-selling” which have also come in for widespread criticism. It helps that Morgan Stanley is having a good year, and so can talk about these issues from a position of strength. Kelleher noted that one source of this strength has been the bank’s ability to generate diversified revenue streams by cross-selling, unlike “some European competitors” whose reliance on a small number of markets has been a major driver of their current problems.

Separately, Goldman Sachs is preparing to step up its surveillance of employees.The Financial Times reports that the U.S. bank is considering a special surveillance program for employees in remote locations after the 1MDB scandal, which has led to several downgrades of the bank's shares.

“One thing we’re thinking about is looking at people who have an up and down P&L [a profit and loss account that varies], are operating in far-flung places and have a compliance record, however minor, and maybe having a special programme of surveillance for those kind of people,” said a Goldman insider. 

It's not clear what the surveillance program might involve, although J.P. Morgan and Credit Suisse's experiences with Palantir might prove instructive. J.P. Morgan, for example, monitored employees who began arriving later to work than usual, as this was seen as a sign of disgruntlement). Credit Suisse looks out for 'common toxic combinations,’ like trading in internal accounts, cancelled trades, unusual cell phone usage and door swipes. Goldman bankers Tim Leissner and Roger Ng aren't traders, but if the two men accused of participation in the 1MDB scandal had arrived at work late or swiped in and out unusual times, the alleged events might never have happened.


Marko Kolanovic of JP Morgan is known for causing major market turns with your research notes, and has been called “Half Man, Half God” by CNBC. As “global head of macro quantitative and derivatives research” at JPM,  his unique alpha comes from being the market’s most prominent robot-whisperer.  His research team look at market movements and big data with the aim of predicting the aggregate behaviour of quantitative and trend-following funds.  Interestingly, he identifies “potential abuses with social media posts and headlines” as potentially one of the most important issues for market structure going forward, even suggesting that algorithms might start throwing off their own fake tweets to defend themselves. (Bloomberg) 

Deutsche Bank news continued to pile up over the weekend, with more money-laundering probes.  Christian Sewing has given a motivational speech to top management and recommitted himself to Deutsche’s independence.  But is he running out of options? (Bloomberg)

Bank of America has had a super year in equity IPOs, raising its market share by 2.5x and leaving the next best (Goldman) way behind.  They’ve been helped by a good overall year for IPOs which wasn’t dominated by megadeals and which happened to be driven by their strongest sectors in healthcare and tech.  Hopefully some “horrific” compensation there too! (Business Insider)

Also on the subject of incentive compensation and alignment with shareholder interests, UBS shareholders might raise an eyebrow at the latest Bilanz magazine Rich List for Switzerland, in which both Marcel Ospel and Ossie Gruebel rank, but Sergio Ermotti (so far) doesn’t.  The richest banker on the list (when considering wealth created by banking alone) is Prince Hans-Adam II of Liechtenstein (Finews)

Not such great news for the global hedge fund industry; 2018 has been a year to forget for most of the biggest players (FT)

Goldman Sachs has upped its estimate of the number of job moves in the event of a no-deal Brexit – as many as 700 posts might need to be relocated (Financial News)

For any given number of hours worked in a week, the more you earn per hour, the worse you feel in terms of being short of time.  Rich people are always in a hurry (FT)

And a story which, while puerile, is scientifically valid and even important for those of us who do a lot of business travel – flying makes people fart more and there is medical advice available about what to do about it.  (Vice)

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