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Monday, 17 August 2009

Fairly priced pay

J.P. Morgan have asked the FSA to review a multi-million pound compensation package being offered to entice Todd Edgar, a proprietary trader, to join Barclays Capital with his team. The five man team are reportedly being offered £30m in cash and stock to join Barcap.

What does Edgar and his team do to merit this amount of pay? At J.P.Morgan he headed the bank’s London-based commodities proprietary trading desk and ran a $2 billion portfolio. He took a bullish view on gld in 2006 when gold was languishing in the doldrums, buying physical gold and gold futures and options, making a $250 million profit in 2007.

I make that about a 12.5% return on his $2 billion, which is not that fantastic, but it is pretty god going for a gold trader because the market is not at all volatile.

On the other side of the Atlantic Citigroup is in a compensation tussle with Andrew J. Hall, the British head of Phibro, the commodity trading arm that Citi acquired with Salomon. Hall has earned way over a quarter of a billion dollars in the last 5 years, mostly by betting correctly that demand from China and India would drive up the price of oil. Now that the US government owns a large stake in Citigroup, they have baulked at the idea of paying a trader many times more than the chief executive.

Hall has pointed out that his division makes spectacular amounts of money and that he has long had a profit-sharing contract with Citigroup and its predecessor banks entitling him and his small team of traders to a large percentage of Phibro's gains. The percentage under the contract terms currently stands at below 30%.

On the other hand critics say that Hall's busines is only viable because it has received funding from the Citi treasury that it would not be able to attract as an independent entity, and there appear to be no suitors trying to poach Hall and his team.

My guess is that J.P. Morgan's protestations aout Todd Edgar will be to no avail despite some froth in the UK media, and Hall will lose out to the US government. The difference: Barclays are paying an arms length price for Edgar and his team, Citi's deal with Phibro and Hall is an intenal affair and only continues because management alows it to do so - Phibro's funding could be cut in an instant and I bet that isn't covered by Hall's contract.

The issue is not whether Edgar or Hall are paid vast amounts of money for winning trades. The issue is whether tax payers in the US or in the UK, want to guarantee the deposits placed with Citibank or Barcays when there is a run on the bank because of losing trades. People like Edgar and Hall make the case for a Glass-Steagall style separation of traders from deposit takers.

1 comment:

Steven_L said...

I think there is a good case. The argument for paying good traders 20% or so of their gains seems to be that they could go work for a hedge fund or set one up themselves and go freelance.

Great, let them do it, and while we're at it deregulate the consumer protection side of things so we can all chuck a bit of spare change in for them to do their magic with.