By John Gallagher,
Money and Investing Writer
Once upon a time, fixed income traders were the “masters of the universe.” The markets were booming and top performing traders were awarded million dollar bonuses.
The de-regulatory zeitgeist leading up to the financial crisis had the markets on a roll, capital flowing, and derivatives consisting of loans soon to default traded all throughout Wall Street.
The free flow of capital and the lack of regulation led to the financial crisis of 2008-2009.
Banks with bad debt on their balance sheet suffered crippling losses and the United States government had to step in to provide $700 billion in a relief effort to keep the banks afloat.
The recession finally prompted finance leaders to increase regulations, mainly an increase in capital requirements.
The division at investment banks that has taken the biggest hit from the new regulations is fixed-income trading.
Bloomberg data shows revenues at the fixed income desks of JP Morgan (NYSE: JPM), Citigroup (NYES: C), Bank of America (NYSE: BAC), Goldman Sachs (NYSE: GS), and Morgan Stanley (NYSE: MS), have been falling since 2012.
In response to the falling revenues, banks have begun cutting fixed-income traders and salespeople.
The Wall Street Journal reported that Goldman Sachs is cutting 10 percent of their fixed-income staff, approximately 250 people.
Morgan Stanley has been more aggressive, slashing 25 percent of their fixed-income department last month, 1,200 jobs.
In Morgan Stanley’s latest effort to turn around its struggling fixed-income business, they have named Sam Kellie-Smith, previously global head of equities, the new head of the fixed-income and commodities division within Morgan Stanley’s investment bank.
Morgan Stanley has failed to reach the goal of earning a 10 percent return on equity over the last few years, a goal set by CEO James Gorman.
Kellie-Smith’s successful track record in global equities has upper management convinced that he can lead this unit to a 10 percent return, a difficult feat in today’s capital intensive regulatory environment.
Smith’s promotion is just one moving piece of a management shakeup that involved the previous head of fixed-income, Robert Rooney’s promotion to chief executive of Morgan Stanley International and head of Europe, as well as other key executives retiring or moving up in the organizational hierarchy.
The moves reflect a larger trend on Wall Street that banks are moving away from the once glorified, once profitable business of fixed-income trading.
Deutsche Bank (NYSE: DB) and Credit Suisse (NYSE: CS), two large European banks have announced cuts in their fixed-income department, Goldman Sachs has cut their fixed-income staff, and Morgan Stanley is the latest to announce cuts.
The business of trading debt instruments is losing its profitability, which could indicate a decrease in the risky behavior that had fixed-income revenues high, but simultaneously led to the infection of the entire financial system with bad debt, causing the financial crisis.
In this low rate, highly regulated environment, it is becoming increasingly difficult for traders at fixed-income desks to turn a profit, and after the latest downturn in the financial markets caused by concerns over global growth and low oil prices, it is unlikely that rates will move much, if at all in 2016.
The debt market, which is roughly twice the size of the equity market, is a different marketplace than it was prior to the financial crisis, and we’re just now beginning to see how Wall Street banks are responding.
A version of this article appeared in the Tuesday, January 26th print edition.
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