Goldman Sachs' fixed income currencies and commodities (FICC) division has a well-documented problem. After a period of persistent under-performance dating back to at least 2014, the business is emaciated. In the fourth quarter of 2017 revenues were $1,003m, 42% lower than four years previously. Harvey Schwartz detailed a plan to fix things back in September. But Schwartz is leaving after losing the race to become CEO, and he's not the only one: in recent weeks, Goldman has suffered an exodus of talent from its London macro trading business with the exit of its head of European interest rate swaps trading, two traders, two salespeople and two structurers. Several are going to Deutsche Bank; others are thought to be joining hedge funds.
Traders leaving banks for hedge funds is nothing new. They've been doing it ever since the Volcker Rule inhibited banks' ability to take proprietary risk after the financial crisis. However, the exodus from Goldman's London G10 rates team has been pronounced for a few years, starting with the Oliver Curri's move to Citadel in 2016, followed by Sam Rosenberg's exit to BlueCrest last June and then the recent departures of Kingsbury along with more junior traders like Patrick Stewart and Stanley Sheriff. Goldman insiders point to the fact that it's not just the old-hands that are "retiring" to hedge funds: it's the next generation of young talent that should really be leading the bank to recovery.
In Goldman's defence, the exits are from one team. In a diversified firm with $32bn in annual revenues, a talent-leak on the London G10 rates desk isn't the end of the world. This doesn't mean it be ignored: As research firm Coalition's most recent league table for 2017 makes clear, G10 rate trading has historically been Goldman's strong point: the firm ranked second globally for the business in 2017 It was the only FICC business where Goldman was in the top two.
Speaking off the record, insiders offer a litany of reasons for their dissatisfaction. Predictably, one is pay: compensation was lower than expected last year. At a house like Goldman this is a problem. "It's always been harder to do business here because we have a smaller platform with fewer people and clients are suspicious of us," says one trader. "This didn't matter as long as we were paid well - no one complained, but now the securities division has all these problems and pay at Goldman no longer stands out." Another trader says compensation was down for most people on Goldman's macro team last year: "Only the good guys were paid flat... It's what you'd expect when the firm has a bad year."
Pay isn't the whole of it though. Insiders on the macro desk also complain of a dialing-back of risk. An excellent analysis of Goldman's problems by Nick Dunbar at Risky Finance. Dunbar shows that Goldman's FICC issues are almost entirely down to the disappearance of trading days on which it earns more than $100m. Between 2010 and 2016, Goldman averaged more than $100m on 40 days each year. In 2017 there were just four days when traders made $100m+. In turn, this feeds back into pay. "There's much less upside than there used to be at Goldman," says one insider. "Before, when you made a lot of pnl, you got paid. Now, it's much less rewarding to take risk."
With senior management in flux, there are complaints too of all-consuming internal politics, of poor line management and poor technology on the trading floor. Last November, Goldman Sachs promoted its biggest ever class of managing directors (MD) but juniors we spoke to complained that the firm seemed to have selected MD haphazardly as a means of palliating a poor bonus round. With two years before another class of MDs is made, not everyone can be bothered to wait until the next time.
Goldman didn't respond to a request to comment for this article. However, the firm would likely defend its MD choices as in line with Schwartz's strategy to increase FICC revenues by $1bn+ in the next three years by chasing both corporate clients and long only asset managers. One insider said Goldman is avidly pursuing "market share" and that sales professionals therefore have the "upper hand" over traders. Another noted Goldman's historic strength as a solutions house but said the firm is increasingly after flow revenues, with the result that "flow people" who make markets in easily tradeable products rather than structuring bespoke solutions for clients are ascendant. This too showed in recent MD promotions, with people like Johannes Steffens, the London-based head of flow credit sales for Germany, and Sebastien Ayton, the (also London-based) head of flow credit sales for France, getting the call from the top.
The outflows from Goldman's G10 macro desk are not immaterial though. Insiders say they should not be ignored. "The exits are a big deal," says one. "The very best risk takers are leaving - both at the junior and the senior level."
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