2007 was a baad year for some. Who and what had it worst? Here’s our verdict…
After failing to spot the sub-prime juggernaut until it came careering around the corner, ratings agencies are unlikely to be trusted in quite the same way again.
The Financial Times reports figures from Moody’s, which suggest more than $45bn of CDOs of ABS have now gone into default, while Morgan Stanley says more than 2,000 CDOs were downgraded in November alone.
All that downgrading is likely to keep ratings agencies busy, but there are clouds on the horizon. The UK’s Financial Services Authority is setting up a task force to examine the role of the agencies, which could lead to greater regulation. The European Commission has also launched an investigation and the Connecticut attorney has kicked off ratings agency scrutiny in the US with an investigation into whether agencies exerted improper pressure on debt issuers.
In the mean time, with CDO issuance no longer what it used to be, ratings agencies have lost a valuable source of income. One senior insider says their structured credit teams, which were hiring rapaciously at the start of 2007, have stopped hiring altogether: “Now that deals aren’t being done, we have overcapacity in these areas. We don’t intend to get rid of anyone next year – that’s not what ratings agencies are about – but we may need to reassign staff if this carries on.”
The leveraged finance bubble deflated messily in August, leaving banks with an estimated $300bn (€205bn) of leveraged buyout debt on their balance sheets, according to Financial News. Banks have been trying to sell some of it on at a loss, but the paper says estimates suggest that around $125m remains on their balance sheets.
Unsurprisingly, given the sudden lack of appetite for leveraged debt, banks like UBS, BNP Paribas and Deutsche Bank are less interested in hiring leveraged financiers than they used to be. “Leveraged finance was a big investment area in the first half of the year,” says Lee Thacker at search firm Silvermine Partners. “But since August and September it’s been totally dead.”
CIBC has publicly lopped its leveraged finance team already and others have been doing so quietly. Thacker predicts further cuts of 5-10% in the first quarter of 2008.
As leveraged finance took a nasty turn for the worse, securitization suffered an extinction event. With bonds securitized against US sub-prime mortgages at the heart of the credit crunch, all securitized products were tarred with the same brush. According to figures from Bank of America (quoted in Financial News), the four-week average of asset-backed and mortgage backed securities issuance was $5.6bn in November, down from a weekly average of $53.7bn in November 2006. Lehman Brothers’ European ABS 2008 Outlook publication says next year won’t be great either.
Collateralised debt obligations (CDOs) were particularly impacted. Once it became apparent that many CDOs were backed by suspect sub-prime mortgages and that others were so complicated that no one knew quite what they were backed by, investors’ appetite for CDOs all but evaporated.
Calyon, Citigroup, UBS, Morgan Stanley, Deutsche Bank and JPMorgan have already made CDO-related redundancies, and although teams are relatively small further cuts are likely unless the market recovers quickly in 2008.
“There was a lot of CDO hiring in the first half of the year,” says Alex Tracey of search firm Clifden Partners. “But this began to slow from May onwards as the market started to sense the impending problems in the credit markets.”
Quant fund managers
2007 was also the year in which quant funds took a tumble. Events that were supposed to happen once every 10,000 years came thick and fast as investors in CDOs were forced to sell equities in a panicked attempt to raise cash.
As a result, Goldman’s Global Alpha fell more than 22% in August. And there were no signs of improvement as the year drew to a close: Goldman Sachs’ Global Alpha Fund and AQR’s Absolute Return fund both fell a further 6% in November.
Chris Hallinan, head of the quant team at recruiter NJF Search, says high frequency funds, which trade at a speed of milliseconds in response to market events, are still hiring, but other areas of the market have seen a “notable slowdown”.
“It’s too early to say what next year will be like,” he adds.
The average bonus at Goldman Sachs and Morgan Stanley was up 6% on 2006, and Lehman’s average total payout was up 10%. However, the news was not necessarily as good as it seemed – average payouts may have been up, but Wall Street’s finest are thought to have focused pay on top performers to the detriment of the average Joe. Moreover, Bear Stearns reduced its average total comp per employee to a mere $242k and further pain is thought to be in store next year when the likes of Merrill and Citigroup reveal their numbers.
Both John Mack at Morgan Stanley and Jimmy Cayne at Bear Stearns have agreed to forgo their bonuses for 2007 after their banks produced dire results. Josef Ackermann at Deutsche also volunteered to relinquish his payout earlier this year, but may now be hoping that people have forgotten that.
Chief executives and big swingers
2007 was a big year for defenestrating big banking chief execs. Peter Wuffli at UBS was the first to be metaphorically thrown out of the tinted window of the bank’s Broadgate offices in July, and was followed by Stan O’Neal at Merrill Lynch and Chuck Prince at Citigroup, both of whom were given handsome payoffs. The credit crisis also claimed a whole host of second lieutenants and heads of fixed income everywhere from Morgan Stanley to Bank of America and would probably claim a few more – were it not for the fact there doesn’t seem to be anyone to replace them.
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