In Davos, Goldman Sachs president Gary Cohn said something sardonic about the need for more hedge fund regulation. The magic word – ‘Goldman’ – meant that the media fell on it like hungry wolves, and gave the standard critique.
But what do hedge fund managers think? Are they beating off offers to return to work in a bank? Are they envious of all the first-class air travel they left behind from their sell-side days?
You might assume that wouldn’t apply to those hedgies we asked in our vox pop, as they are already worth multi-millions. But you may be surprised. Everyone wants to be Lloyd Blankfein.
We have to keep their identities top secret, in case the banks are unkind to them for half-speaking out. We asked them what they would do if they were running Goldman Sachs or Morgan Stanley, or perhaps one of the others, mindful that there aren’t many others left. Would they want people jeering at them every time their bonuses are due to be announced?
“Banks have an impossible capital structure problem,” says one, whom in Quentin Tarantino-style (Hedge Dogs) we shall call Mr Pink.
"Even with capital adequacy raised from 5% to 8%, you’re still 12 times geared, maybe 30 times if you were in Europe. Who knows if these banks are solvent or liquid? It depends on accounting practices, the good graces of your government or the ECB. It still has to be clarified.
"You’re serving two-and-a-half impossible masters. You have to charge a fair margin of 2%, so no loan-sharking, you have to serve shareholders who want 25% annual return on equity and you have to pay yourself a nice bonus at Christmas. It doesn’t all add up, so you have to gear up 20 times. If the game doesn’t continue, though, then it’s no fun being Lloyd.”
“I think it's always fun being Lloyd ,” replies another, Mr Brown. “If I was running Goldman I’d carry on doing exactly the same thing I’ve always been doing, taking as much risk as possible. I now have direct access to the Fed, so I can borrow at zero. So my incentive is to gear up as much as possible and take as much risk.
“The more I do that, the less is my chance of failing as it would cost everyone more. I would be less tone deaf than they are about questions as to how I was making that money. I’d take Lucas Van Praag [who runs corporate communications globally at Goldman Sachs] and put him in a sub-basement for five years, and replace him with a basket of kittens, in order to present a cuddlier image.
“The moral hazard has only increased,” Mr Brown rages on. “The banks called the government’s bluff and it's no longer credible for the governments to say, ‘we’re going to tinker at the margins’ because they’ve come to the abyss and now know there are institutions they can never get rid of.
"Even the management won’t pay the price except for perhaps skipping a year of cash bonus and they still got stock options at the expense of shareholders, when the stock price was low. So, yes, banks are a wonderful place to be. “
Won’t it be less fun, though, being JP Morgan chairman Jamie Dimon or Blankfein or Citigroup CEO Vikram Pandit, or whichever guy is running Bank of America Merrill Lynch, given the Volcker rule?
“The Volcker rule is reasonably toothless,” adds Mr Brown. “Everyone is complying with it ahead of time. I think that’s a desire to get rid of some legacy-expensive people and to transition lower margin areas of risk-taking into third-party money.
"The lesser return part of most of these banks' books will then be done on someone else’s books and probably make less money than when the bosses focused on it being their money. The really good stuff will be kept in house or in partnerships available to employees.”
So it looks like they are going to stay as hedge fund managers, unless a pucka offer comes along from one of the better shops.
“The banks are naked emperors, and despite the spin they may seem regally dressed once again, but it is still a transparent outfit, “ says Mr Pink. “It must have once been great to be the head – as you got a put from the government, so it was really a government employee job, and you got paid hundreds of millions. If that gravy train returns I’d love to be head of Goldman Sachs again*, but if it doesn’t then I don’t want to be head of RBS or Citi. It wouldn’t be fun. I’d get all the blame and not get paid.”
(* we don’t know why he said ‘again’, because he wasn’t before)
So, is it fun being Lloyd Blankfein? The answer is a resounding “YES!”