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Morning Coffee: U.S. investment banks are increasing their dominance. Hedge funds getting squeezed over expenses

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Even before Trump comes in, U.S investment banks have reasons to be happy. Even before they reported sizeable gains in the fourth quarter, Wall Street’s biggest banks had widened their lead over European rivals in securities trading and now control around 60% of the global market.

Perhaps no one in the industry is happier than J.P. Morgan Chase CEO Jamie Dimon, who’s getting a $1m raise from 2015 for a grand total of $28m in compensation for 2016, a 3.7% year-on-year bump. However, across the pond, European banks’ outlook isn’t so rosy.

Brexit is turning into a slowly unfolding train wreck for investment banks in the City.

On the one side is Barclays’ CEO Jes Staley, who says that the U.K. will continue to be the “financial lungs for Europe” and that most of the bank’s European business will stay in London post-Brexit. However, HSBC is planning to move a thousand jobs out of London, Goldman will relocate 3k from the City, and J.P. Morgan and UBS are both planning to move an unspecified number of employees out of London.

Speaking at the World Economic Forum meeting in Davos, the mayor of London warned attendees that a hard Brexit would drive financial services jobs to Hong Kong, Singapore and New York, not continental Europe. Christine Lagarde, managing director of the International Monetary Fund, said at the WEF that everything may seem OK now but that the U.K. would feel serious Brexit-induced pain down the road.

Prime Minister Teresa May attended a private WEF session with financial services executives in an attempt to calm their frazzled nerves. She said, “I value financial services in the City of London, and I want to ensure that we can keep financial services in the City of London.”  Also at Davos, Chancellor of the Exchequer Philip Hammond said that financial services will be a “priority” for the UK government in its Brexit negotiations.

Despite widespread worsening Brexit anxiety, top bankers in Davos believe that London will probably end up winning the battle over its clearing industry.

Separately, it’s well-known that hedge funds are struggling to justify their exorbitant fees as returns fall by the wayside. But included within this are everything from buying out new hires’ deferred bonuses to picking up traders’ dinner expenses. If performance fees hurt, “pass through” expenses – which also include travel and investment in technology – are increasingly resisted by investors. Reuters reports that big firms like Citadel and Millennium are still putting these expenses through and almost doubling the already sky-high 2 and 20 performance fees. Hedge funds suggest this helps them recruit and retain the ‘elite’ talent that help them generate good returns. This is increasingly difficult to justify – as Matthew Granade, chief market intelligence officer at Point72 Asset Management, told a conference this week: “It’s kind of: ‘I promise you a Rolls Royce and I give you a Honda’”.

Meanwhile:

Steven Mnuchin, Trump’s pick to be Treasury secretary, didn’t disclose almost $100m of his assets to the Senate Finance Committee and forgot to mention his role as a director of an investment fund located in a notorious tax haven. (New York Times)

Is Mnuchin deserving of his reputation as the “king of foreclosures?” (WSJ)

Victims describe OneWest Bank as a “foreclosure machine.” (The Intercept)

George Soros said that Trump “would be a dictator if he could get away with it” (New York Times)

Accenture is saving one big bank $100m a year in compliance salaries by automation. (Business Insider)

Boutique investment bank LionTree, focused on media, technology and telecommunications (TMT), is opening a Paris office. (Reuters)

The shiny future of fintech has run into the stodgy present in the form of banking regulators. (Bloomberg)

Advancements in artificial intelligence have even surprised Google co-founder Sergey Brin. (Bloomberg)

The Securities and Exchange Commission Chief of Staff Andrew “Buddy” Donohue will be stepping down at the end of the month. (SEC.gov)

If you’re familiar with financial trading and know Python, then you can get started with basic algorithmic trading in no time. (O’Reilly)

UK minister was rejected from an investment bank because she couldn’t afford a gap year (The Times)

Students at elite colleges are even richer than experts realized – at 38 colleges in America, more students came from the top 1% of the income scale than from the entire bottom 60%. (New York Times)

Photo credit: Stockphoto24/GettyImages

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