We came across the article below, which was first published on this site in 2005. Back then, suggesting the boom in credit derivatives jobs might be a transitory phenomenon was rather like denying banks are in crisis today. But one lone recruiter (Noel Marshall of Finance Professionals) dared buck the trend. In retrospect, his comments seem eerily prescient…

Rise and fall of credit derivatives: Guest comment

Welcome to January, 2009. It’s not a brilliant start for those structuring, selling or trading credit derivatives.

You have specialised in the sector for the last few years but you do not get headhunted any more, your salary did not go up last year, your bonus is probably going to be around 5% and a vicious rumour just went round that Deutsche Bank is making huge redundancies.

How did this happen? A mere few years ago, say, in 2005, you secured your first role in credit derivatives. Times were good – vanilla products were yesterday’s news, and if you wanted to make serious money you needed to be a player – not just in the derivatives market but specifically in credit derivatives.

Bright and ambitious individuals were drawn to all elements of the market, from product development to systems, to trading, to accounting and to legal support. If you had even a single week’s credit derivatives experience, you could airily claim to be a specialist. Even better, if you had graduated in 2001 to 2003 and been one of the few people to make it into the market, then you were singularly blessed indeed.

You were headhunted daily, your salary rose dramatically, bonuses were pleasingly vast, and if you handed in your notice you knew you would have money and promotions hurled at you. Everybody wanted you, and La Dolce Vita beckoned.

Would you credit it?

Then the balance of supply and demand started to shift, not yet volcanically, but noticeably all the same. At first, there was the natural maturing of the products. One year’s experience became two and then three. But not every analyst can become an associate, and not every associate can be a VP, and by 2007 there were quite literally legions of candidates in the market with 2+ years’ credit derivatives experience.

In 2004 and 2005, the markets were buoyant and the banks went to the milk rounds with renewed vigour, bringing in larger numbers of talented individuals than at any time since 2000. This time fresh grads did not become equity researchers or TMT corporate financiers. On the contrary, this time the brightest and best were placed into credit derivatives.

What’s more, there were the new players on the block, names without the pure investment banking pedigree in M&A who saw derivatives as a way to level the playing field. ABN AMRO decided to stop being all things to all people and to flex its undoubted financial and geographical muscle to build a market-leading derivatives business.

UK banks best known for their retail operations, such as Lloyds TSB and Royal Bank of Scotland, joined the fun. All of them went recruiting. It became akin to a gladiatorial contest, as only the fittest survived. They approached the market with a hunger and drive that only the newly converted can muster, poaching talent from right under the noses of the old guard. Goldman Sachs loses candidates to ABN AMRO! It’s ‘thumbs down’ to the veteran warriors. The world shifts on its axis. Where will it stop? Are we not entertained?

A circus maximus

Well, actually, yes we are, but now, in 2009, the blood sport is at an end. Or maybe the real show is just about to start: take one niche market, add all the players in the City who want their share, fight over talent, bring in more graduates, MBAs, newly qualified accountants, lawyers, and now you have a huge market with a vast candidate population.

So what about the product? How many ways can you cut the risk, how many times can credit exposure be repackaged and hedged and then traded from bank to bank? How big a house of cards can be built before one big default and everybody realises that they have just bought the risk in one derivative that they thought they had sold in another.

At the close of 2005, the appetite from corporates for this insurance-like product seemed to know no bounds, and why not? Why risk being left holding the baby if you didn’t have to? But how much could the City truly carry and what would happen if one day somebody made a claim?

The City indeed over-extended its ambitions. Individuals jostled for top billing, earning ever-increasing salaries and taking home colossal bonuses, blissfully unaware of the impending inevitability.

Tempus fugit

If you remember the markets of 1998, a bright graduate with six months’ equity research experience in new media or telecoms was courted by every bank. By 2000, this individual was a king – the future was bright, the future was Orange and Mannesmann. By late 2001, it was all over. The equity researcher was unemployed, the salary spent and the bonuses blown. The markets hit their peak and suddenly there were far too many people with unwanted skills.

The simple truth is that when banks go to the market now in 2009 looking for a credit derivatives trader with 2+ years’ experience, or a product controller to come in at VP level, they will find that there is a startlingly high number of candidates out there.

As always, the best of the best will be clamoured over by everybody. But unless you are in the top 15-20% of your respective field, you will suddenly find that you are not as ‘hot’ as you once thought. In fact, the banks have a lot of choice and they do not need to pay through the nose for talent – and so they won’t.

Credit derivatives, anno 2009… caveat emptor.

Noel Marshall is managing director of recruiter Finance Professionals.