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Morning Coffee: What happens if Deutsche dumps its U.S. investment bank? Pay to play for the City of London

Deutsche's U.S. investment bank punches above its weight when it comes to fines and below its weight when it comes fees. The discrepancy hasn't been a problem until now, but thanks to the crippling $14bn fine imposed upon Deutsche by the U.S. Department of Justice, this could be about to change.

As Deutsche attempts to negotiate the fine down to something more manageable (say, $4bn?) German newspaper Welt am Sonntag reports that the bank is under pressure from regulators to, 'shrink its U.S. activities' and will probably give up part of its investment banking business.

That sounds ominous for the 2,164 people FINRA says Deutsche Bank Securities employs on Wall Street. It sounds especially worrying for Deutsche's U.S. fixed income traders - and even maybe for the bank's fixed income business globally.

Deutsche's investment banking presence in the U.S. dates back to 1999, when it acquired Bankers Trust.  In doing so, it bought one of the more pioneering banks in U.S. fixed income markets and boosted the fledgling fixed income business set up by Anshu Jain, who joined from Merrill Lynch four years previously. Ever since, Deutsche has been busy trying to strengthen its presence in the North American market. 17 years later, however, it doesn't have a huge amount to show for it.

As the chart below from Coalition shows, Deutsche's investment bank ranks seventh overall in the U.S. - Ahead of UBS and Credit Suisse, but behind Barclays. And while Barclay's U.S. presence is broadly based across fixed income trading (FICC) and equities trading and the investment banking division (IBD), Deutsche's U.S operation is a one trick pony: it ranks in the top six for FICC but the top nine for everything else.

Coalition Deutsche

Coalition key

It's unfortunate, therefore, that Deutsche's comparatively diminutive U.S. operation has attracted so much of the wrong kind of attention. Deutsche Bank Securities' FINRA report shows 230 "regulatory events", compared to 73 at Barclays. The regulatory event that triggered the D.O.J. fine dates back to the mis-sale of mortgage backed securities between 2005 and 2007, but it could be 2017 that the effects make themselves felt.

If Deutsche gives up 'part of its U.S. investment banking business' as suggested, U.S. fixed income trading will almost certainly be the part to go. The business has looked exposed ever since the German bank was forced to separately capitalize a U.S. holding company this July: Deutsche can hardly argue that the $14bn fine is threatening its capital integrity when it could save capital simply by curtailing its U.S. fixed income trading operations.

The real question is what this will mean for Deutsche's global fixed income trading operations? The U.S. debt markets are huge. Can Deutsche maintain its position as a tier one fixed income trading house globally without a foothold in the flows on Wall Street? While other European banks (eg. Paribas) are trying to build their presence in the Americas, Deutsche Bank is in danger of forcibly dismantling what it's already got. That can't be good when Europe is in a state of Brexit-inspired flux. We're not the only ones with concerns. In a note out today, analysts at Bernstein Research say it's not an option for European banks like Deutsche to pull back from America: that doing so would render their investment banking franchises irrelevant.

Separately, the Financial Times has heard talk of a solution to the City of London's Brexit woes. It thinks the UK might possibly pay something to garner continued access to the European market for financial services. “If we have to buy this market access by making continuing contributions to EU budgets, that may well be a price worth paying, given the number of UK jobs that are involved,” says Oliver Letwin (not actually part of Theresa May's government but a favourite of predecessor David Cameron). That's alright then.


Maybe Deutsche Bank will cut another 1,000 people. (Reuters) 

British government's departmental infighting means banks don't know where they stand. (Bloomberg) 

J.P. Morgan's fixed income trading revenues were the best since the first quarter of 2013. (WSJ)

Richard Boath, the former chairman of financial services at Barclays, is alleging unfair dismissal, has a pay dispute, and is making a claim under whistleblower protection laws (which mean is compensation will be uncapped). (Financial Times)

Hound of Hounslow to be forcibly extradited to the U.S. for allegedly causing the flash crash. (Independent)

UBS's new London site is go. (FiNews)

How hedge fund managers spent their money. (GoBankingRates)

Two former Millennium Management hedge fund managers are launching a tiny hedge fund in November. (Business Insider) 

Are you intelligent enough to become a British government spy? (Telegraph)

Retire from hedge fund, become Twitter-based guru. (Bloomberg)

Hilary Clinton's advises Lloyd Blankfein on getting into politics: “I think you would leave Goldman Sachs and start running a soup kitchen somewhere. Then you could be a legend in your own time, both when you were there and when you left.” (NY Times)



AUTHORSarah Butcher Global Editor

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