Morning Coffee: Deutsche Bank changes its mind again, and the letter that killed a senior banker's career

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Deutsche Bank strategy reversal

Deutsche Bank’s stop-go strategy in investment banking hiring has now come to South Africa, where as many as 26 new hires are planned across fixed income, corporate and treasury solutions, and the new Corporate Finance Coverage unit to be headed up by Gregory Scott. This comes after, as recently as June of last year, Deutsche announced 50 job cuts, as corporate broking, advisory and financial sponsors units were discontinued. What’s going on?

According to the local chief executive, Muneer Ismail, Deutsche’s plan is to “get back to fighting strength” in areas like fixed income where the bank has a global franchise, but it’s certainly a legitimate question to ask why it fell below fighting strength in the first place. It certainly looks, from the outside, like a showcase for the twin strategic errors that investment banks always seem to make – short-term planning, and headcount fixation.

Short-term business cycles are, to an extent, inevitable when you’re in a business that is subject to as much volatility as investment banking. But at a strategic level, it’s incredibly wasteful and expensive to go in and out of business lines and geographies. Not only do you tend to pay more to hire new staff than you were paying to keep the old, you tend to get a reputation for not being wholly committed to the market, and so to have to pay “danger money” to new hires to compensate them for the career risk. Downsizing by trimming costs and staffing levels is one thing, but shutting down a whole business line is the sort of thing banks only ought to do if they’re reasonably sure they’re leaving that part of the industry for good.

So why do they do the opposite? In many cases, because investment banks tend to make plans from the top down rather than the bottom up. A number is chosen for cost cuts on the basis that the C-suite think it will sound good when announced to the shareholders (even worse, a target is announced for a cost-income ratio, meaning that the next year’s strategic plan will be determined by the market environment). Then, this number is turned into a staff reduction target by the corporate centre, which is communicated to the business units in headcount terms. And then local and business line management have the job of implementing the cost targets, not of arguing about what they might mean in franchise terms.

That’s how you get a situation where Deutsche, having lost 50 jobs last year, is now hiring 26 of them back. And the state of play in South Africa is hardly unique, either in Deutsche or the industry as a whole. Cost cutting strategies often look and sound good when they’re first announced, but cost cutting ought to be the result of a plan, not a substitute for one.

Elsewhere, and somewhat predictably, Robin Phillips has left as co-head of investment banking at HSBC. The bank is not commenting on whether the departure is anything to do with the anonymous letter circulated five months ago containing phrases like “We are entirely fed up and demoralised” and “Phillips and his coterie should be replaced by the world-class investment banking professionals which HSBC deserves”, but it’s hard to escape the suspicion that this time someone came at the king, and didn’t miss.

Investment banking is a people business – it’s a cliche of the industry, but it’s true. Phillips’ reputation at HSBC was as “a steady pair of hands” who “tends to leave you alone as long as you’re making money”. That’s what people say about you when they like you. When times turn bad, though, and when nobody is making money, it’s the nature of the business that everyone starts looking around for someone to blame. And in banking as in football, a manager who has “lost the dressing room” is basically unable to do the job. Sole control of the HSBC investment bank now goes to Greg Guyett who joined from JPM in October last year (in retrospect, this should have been seen as the end of the Phillips era). And after a brief honeymoon period, he’ll face the same reality; heads of investment banking are like tribal monarchs, they get sacrificed when the hunting turns thin.

Meanwhile

The UBS French tax case ended almost as badly as it possibly could have, with a near-record fine of €4.5bn and criminal convictions for five out of six bankers. The sixth was Raoul Weil, who maintains his personal record in the courtroom; he was also acquitted on US tax-evasion charges a few years ago. The trial will be remembered for the French judge’s cutting remark “there was seemingly a serious hiring problem at UBS around that time”. (Bloomberg)

One of the most prominent female-founded hedge funds, Margate Capital, disappears as its founder, Samantha Greenberg is hired by Citadel. (Financial News)

Bill Hillegass, after only a short period as BoA head of equity derivatives, is heading for the buy side. There are suggestions of a “merry go round” effect as banks try to keep staffed up in a relatively hot sector, with hedge funds keen to poach senior talent. (Business Insider)

Revolut’s size and growth (and possibly, although politicians seem to be de-emphasising this aspect now, it’s founder’s family links to Russia) are causing some debate in Lithuania over whether the country’s fintech incubator has grown beyond the capacity of its regulators. (FT)

Two GS forex traders have left to set up a sports betting company. (FXWeek)

And two other GS veterans have moved into market surveillance to try and combat cryptocurrency manipulation. (Coindesk)

Credit Suisse is being offered a look at as many as eight out of ten deals available in the FinTech space, but is still finding it hard to put its money to work. (Finews)

It’s always awkward when a former career comes back to haunt you – the current head of Australian regulator ASIC is being asked by MPs about his time as head of regulation at Goldman Sachs during the 1MDB period. (Guardian)

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