Goldman Sachs’ brutal bonus season 

One thing to start: Muddy Waters has revealed a short position against a €4bn European property company, accusing its top shareholders of using “bond sale proceeds to unduly enrich themselves” and inflating the true value of their assets.

In today’s newsletter:

Goldman bonuses lose their shine

Many bankers had hoped to ring in the holiday season conquering black diamonds in Vail or St Moritz.

Instead, they’ve been confronted with a different kind of downhill slope. Investment banking fees have tumbled 35 per cent year to date, according to Refinitiv data, as fears of job cuts and slashed bonuses loom over the industry.

JPMorgan Chase, Citigroup and Bank of America are considering cutting their investment banking bonus pools by 30 per cent, the FT reported earlier this month. At Goldman Sachs, conditions are looking even more dire.

The Wall Street lender run by David Solomon is considering shrinking the bonus pool for its more than 3,000 investment bankers by at least 40 per cent this year. The prospect of the cuts has also fed fears of high staff turnover in the new year, according to people familiar with the matter.

Final bonus pools are still being decided in Goldman’s chambers of power. If implemented, they’d be the worst since the 2008 financial crisis — just a year after the industry made out with career-high bonuses to many employees on the back of record fees from a surge in dealmaking.

“I think we’re going to be worse than the Street,” said one senior Goldman banker.

Goldman’s 400 or so partners could face even higher bonus cuts, perhaps by as much as half, according to Semafor.

The potential cuts are especially striking given that the bank has outperformed most of its Wall Street peers. In terms of global investment banking fees, Goldman is second only to JPMorgan this year, according to Refinitiv.

The bank’s M&A franchise, meanwhile, has gained market share and is first in the league tables:

Solomon has his reasons for going ahead with the cuts. Pressure is mounting on the chief executive and his top “fixer”, Marc Nachmann — the newly crowned head of Goldman’s merged $2.4tn asset and wealth management division — to narrow the valuation gap between the bank and its rivals.

But Solomon’s sweeping reorganisation has yet to yield the kind of results he needs to boost Goldman’s valuation. Until a substantial resurgence in dealmaking starts bringing in fees (though this week’s “Merger Monday” was a start), or a boom generated by its asset management drive, cutting corners will be inevitable.

Solomon is also considering making hundreds of job cuts at its consumer business in an effort to scale back its “Main Street” banking ambitions, according to people familiar with the matter.

The banking boss-slash-DJ’s plan risks spinning too far, though.

Many of Goldman’s top bankers have already begun searching for opportunities in private equity and alternative asset managers out of concern that the cuts will continue.

Rival HSBC has gone on the offensive, meanwhile, sending out recruitment emails to bankers and other employees at companies weighing job cuts, including Goldman, to capitalise on the attrition and fuel its expansion in Asia, Bloomberg reported.

Upholding Solomon’s “OneGS” mantra — an initiative aimed at promoting more internal collaboration at the bank — will be tricky if the bankers that survive the season of cuts end up leaving voluntarily.

The US braces for a junk loan hangover

America’s $1.4tn risky corporate loan market is in for a rude awakening. That’s the message from analysts at rating agencies and strategists at some of Wall Street’s biggest banks.

The economic slowdown now looming — a point recognised by some policymakers at the Federal Reserve on Wednesday — is likely to ricochet through the corporate world, hitting highly leveraged borrowers hard.

The leveraged loan market has been a critical source of capital for private equity firms financing their buyouts. When the Fed had pegged rates close to zero, credit flowed amply to these businesses, which could easily stomach the 4-6 per cent interest rate they were being charged.

Last year alone, leveraged loan issuance stood at more than $600bn, according to data provider LCD, the highest annual figure it has on record.

But as the Fed has tightened policy, interest rates have surged and now often run between 10 per cent and 14 per cent, or more.

The interest rate rises are expected to set off a surge of defaults, as higher borrowing costs start to bite for heavily indebted, low-grade companies.

“It’s really the US loan market that we think has the most fundamental risk this cycle because that’s where the floating rate debt has combined with aggressive releveraging,” Steve Caprio, a credit strategist at Deutsche Bank, told the FT’s Harriet Clarfelt.

Forecasts vary widely for how bad things could get. Definitions of default also differ.

Some analysts warn that one in 20 loans could default next year. Others believe the number could be considerably higher. But broadly, Wall Street banks and rating agencies expect defaults to at least double from today’s relatively low levels of 1.6 per cent.

Looking at the overall speculative-grade US debt market, S&P Global Ratings said that “much will depend on the depth or duration of the recession” in 2023.

How uplifting.

Job moves

• Citigroup has promoted more than 100 women to the role of managing director, the highest ever for the bank, per Reuters.

• Deutsche Bank has named Pierpaolo Di Stefano as vice-chair of origination and advisory for Europe, the Middle East and Africa. He was previously chief investment officer of Italy’s Cassa Depositi e Prestiti and chief executive of Cdp Equity, its strategic equity investment arm.

• Goldman veteran Tim O’Neill is retiring after nearly four decades at the Wall Street investment bank, per Bloomberg. He became a senior adviser in 2020 after running the investment management unit that oversaw Goldman’s asset and wealth management arm.

• KPMG hired Linklaters partner Stuart Bedford as its new UK head of law. He replaces Nick Roome, who will take a new role focused on growing KPMG’s legal business.

• BlackRock has named Sandy Boss as chief operating officer of its global client business. It’s also launching a new global markets group that will be run by Manish Mehta, its former head of human resources, among other moves, Bloomberg reports.

• Law firm Sidley has named 44 partners and promoted 16 lawyers to counsel.

Smart reads

‘Plain old embezzlement’ The FTX saga has been dubbed “one of the biggest financial frauds in American history.” But behind the quirky mystique of founder Sam Bankman-Fried, his alleged crimes weren’t as sophisticated as one might expect, the FT’s Josh Chaffin writes.

Rain in the desert It’s the worst initial public offerings drought since the financial crisis. Everywhere except the Middle East, where places such as Dubai have become oases for bankers chasing their next deal, Bloomberg reports.

Healthcare roulette Opaque and convoluted pricing in the US medical system means turning one’s health into a betting game, writes the FT’s Claire Bushey.

News round-up

SEC takes up sweeping overhaul of US stock market (FT)

Elon Musk’s Twitter isn’t paying its bills (Axios)

Twitter suspends account that tracked Elon Musk’s private jet (Wall Street Journal)

Binance chief attempts to allay customer concerns after outflows (FT)

UK Quantum cyber security firm discloses SEC investigation over merger (Wall Street Journal)

EY nominates heads of consulting and audit ahead of break-up vote (FT)

AIG puts crisis-hit unit into bankruptcy to limit bonus payouts (FT)

US to add Chinese chipmaker to trade blacklist (FT)

The Ritblat vs HMRC files (Alphaville)

Private equity/Carlyle: deadline may mark red line where plateau begins (Lex)