Morning Coffee: Goldman rebels are wasting their time. Credit Suisse’s curious bonus system for top performers
The TV series “The Wire” made the phrase famous, but the underlying sentiment is one that’s been familiar for literally centuries; if you come at the king, you’d better not miss. According four different people who have spoken to Business Insider, there is a group of Goldman Sachs partners who are so disgruntled with CEO David Solomon and his strategy that they have “considered bringing their concerns directly to the board”.
Well, quite apart from the question of exactly how you go about arranging that meeting, what would they say when they got there? There is no shortage of critics of the current Goldman Sachs strategy, but the “platforms and stable revenue” concept is not exactly one that has been sprung on the board by surprise; they knew what Solomon’s vision was when they appointed him. There’s no immediate legal, regulatory or financial crisis at Goldman, the return on equity is in double digits and even the stock price has actually outperformed many peers.
The root of the partners’ dissatisfaction appears to be that bonuses were down, the layoff program restarted and a certain amount of bragging rights might have been lost to Morgan Stanley. It’s hard to see anyone justifying a strategic about turn on that basis. So make no mistake, the only reason to be grumbling about David Solomon right now is if you think you might be able to force him out.
And how likely is that? It’s not completely without precedent on Wall Street, but if you look at what actually happened when Phil Purcell was forced out of Morgan Stanley in 2005, you begin to realise how much it takes to organise a successful investment banking coup. There was a group of emeritus directors (the famed “Grumpy Old Men”) who were willing to go public and against whom it was difficult to retaliate. There was an obvious alternative CEO in John Mack. And there was a much more serious track record of underperformance, which had been picked up by activist investors.
Compare that to Goldman now. Lloyd Blankfein is not scheduled to speak at this year’s Goldman partners’ dinner, but anyone trying to read much into that is likely to be wishful thinking. Solomon’s main rival for the CEO job was Harvey Schwartz, who has just taken the top job at Carlyle. People have suggested Richard Gnodde as a possible alternative, but there’s no evidence he wants to be the king across the water.
There does seem to be genuine discontent among top employees at Goldman, which David Solomon might be well advised to take seriously. Some partners are annoyed by the fact that his pay didn’t fall as much as their rank and file this year (only down 29%, compared to 50% for the partner pool) and he may also have problems with the optics of his hobby; unlike golfing or sailing, it’s hard to be an EDM disk jockey without regularly being seen having fun in public, which can be hard to take when cuts are being made. But taking it to the board is surely a pipe dream, and even complaining at partners’ meetings is likely to be a waste of time. The usual career advice in investment banking is that if you’re not happy with the way the firm’s going, then either suck it up or leave. And it’s a conventional wisdom that’s almost always right.
Elsewhere, the top tier of Credit Suisse management are being asked to buy in to the bank’s strategy, almost literally. It seems that for the 500 top managers (presumably on the Credit Suisse side, not including those who are headed for First Boston), one of the reasons that bonus conversations were being delayed yesterday is that a new incentive scheme is being planned, a “transformational award” which would split SFr350m (US$380m) between the top pool, subject to performance targets being made between now and 2025.
The targets themselves are quite interesting – according to the FT, they relate to the CS group’s return on tangible equity, with a sliding scale between 5% and 7.5%. That immediately indicates that this is not primarily aimed at incentivising performance; it’s about incentivising commitment to the new strategy. Even more unusually, the awards are contingent on making cost targets – the group cost base needs to be below SFr14.5bn, with a range of payouts between SFr14bn and SFr15bn.
That suggests the awards are aimed at managers as much as at frontline revenue producing staff. CS is basically saying that those bankers who believe that it’s possible to revive the bank’s fortunes without breaking the budget will be able to share in the upside from doing so. Most of those who don’t have already left.
Meanwhile …
It’s a lonely life in trading sometimes, but Mounir Gad, formerly of Silicon Valley Bank, took it too far in exaggerating his popularity. Of the twelve letters from friends and supporters giving character witnesses in the sentencing phase of his insider dealing trial, six (including the testimonial from his ex-fiancee) were fakes (Bloomberg)
Wouldn’t it be a fun couple activity for you and your spouse to draw up and compare statements of net worth together, like you would have to if you were getting a divorce? Professional marriage counsellors and divorce lawyers apparently have a frightening degree of openness with each other about finances. (WSJ)
One by one, they all end up being dragged in – SocGen is the latest firm to be named by the SEC in the investigation into historic use of WhatsApp. (Bloomberg)
An “extraordinary banker”, “the most unbelievable client guy”, a “master of the universe”, “the future of banking”. CS executives begin to realise they will be working for Michael Klein soon, and all the praise you can heap on a new boss is never enough. (FT)
“A new ecosystem of hackneyed, alarmist analysts is relying on low-quality data”. Neil Dutta or Renaissance Macro Research doesn’t have much time for Wall Street doomsayers. (Business Insider)
Superstar fund managers are viewed with suspicion at many firms these days, but Stefan Hoops of DWS still thinks there’s a place for high-profile employees, particularly to inspire younger talent. (Financial News)
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