CNBC: You’ve said that within two or three years, the stock market could see a correction of 30 to 40 percent. How are you preparing the firm for this?
Pinto: When you’re going towards the end of the cycle, you want to have an extra layer of prudence. [In the investment bank] we’re going to start being more careful about the liquidity of the book, about the concentration of illiquid risk, about the correlations, about how the positions will trade through different stress scenarios. You keep modeling the book to something that you hope, when the correction starts happening, you are well positioned to continue to be a player in the market, and you aren’t shutting yourself out. The worst-case scenario for any big player is that you end up being massively hammered when the correction happens, and you end up losing money because of your positions.
CNBC: Many Wall Street traders today are relatively young because after the financial crisis, firms sought to cut costs by eliminating more experienced, expensive talent. Is that a concern, for the industry, when conditions turn nasty?
Pinto: All these people, whether they’re senior or junior, lived in a bullish environment for the last ten years. But I haven’t, and many of my managers [have more experience], so we are prepared.
CNBC: In the past decade, you’ve seen the rise of passive investments, the rise of computerized traders like quants, at the same time that regulations have curbed the ability for investment banks to deploy capital in markets. Will that impact the severity of the correction?
Pinto: All these electronic, algorithmic traders, they provide a lot of liquidity in calm markets. So today, you can trade as much as you want every day. When the correction happens, these players tend to fall away, which exacerbates the moves. There’s not as much smart capital [from investment banks] to really provide that rational support to market levels.
That’s why when the correction happens, or we have some kind of bad news, the market becomes very volatile and trading volumes shrink massively. We know how to prepare for those times, and over these days, we are slightly more conservative than we would’ve been a couple of years ago. We try to get through the difficult times as intact as possible to continue to provide liquidity to support the clients. That is in the minds of all the risk managers that we have, all my management team.