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Morning Coffee: The massive bonus that Deutsche Bank wishes it had never paid, and Tidjane Thiam can’t make his mind up

As well as being fascinating in themselves, reports from the latest round of LIBOR trials are a real reminder of how good things used to be at Germany’s national champion, not so long ago.  For the last two years, according to their remuneration report, nobody at Deutsche’s investment bank has earned more than €8m.  Even in 2015, there were only three individuals as this level, and we can be pretty sure that the deferral will be substantial.  But back in 2009, things were very different; a middle ranking rates derivatives trader was taking home US$9m, or as Bloomberg helpfully calculated, $24,000 a day.

The bonus has come up as a key element in the current trial.  Matthew Connolly and Gavin Black are the two former Deutsche employees who are on trial in the USA, and Tim Parietti was one of Connolly’s direct reports, who has pleaded guilty to the same offence and has agreed to testify against his former colleagues.  But … the defence lawyers have noticed that Parietti’s testimony on behalf of the government refers to his being ordered to share his trading position with the LIBOR submitters between 2006 and 2010.  Which is strange as the plea bargain agreement that he struck with the judge only mentions the years 2006 to 2008.

This is … potentially financially convenient, as part of the penalty for admitted LIBOR fraud is that you have to give back your ill-gotten profits.  So if, for example, you had been awarded a $9m bonus in 2010 for work performance during 2009, you might be pretty keen to establish that this was a period in which you weren’t admitting to any wrongdoing.  The defence’s argument is that since this prosecution turns on quite specific details of who said what and how far the envelope was pushed, it isn’t a great look for the government case to depend on someone who says one thing in one venue and another thing in another, particularly when he has a pretty massive financial motive to do so.

Deutsche Bank isn’t a direct party to this trial – they made their settlement a couple of years ago.  But they are probably looking back on this episode ruefully. The year 2009 was a massive revenue year for Deutsche, particularly in their (at the time) market leading rates & forex franchise.  In the immediate aftermath of the crisis, dealing spreads in rates products widened substantially, and market share concentrated significantly as clients preferred to deal only with the biggest players, and even within that group tended to gravitate toward too-big-to-fail banks as their preferred counterparties.  If you were trading FICC products at Deutsche back then, you could hardly fail to make money, even if you weren’t cheating.

The 2009 experience had strategic repercussions that lasted for most of the following decade.  Deutsche’s apparent quick return from the crisis (and lack of need for public sector bailout) convinced the bank’s top management that they were going to be one of the last players standing, and that the FICC-driven, balance sheet heavy approach to sales & trading was their key competitive advantage.  The quick return to profitability was one of the factors behind the consolidation of Anshu Jain as the natural successor to Josef Ackermann.

And of course, it was a mirage.  The year that Tim Parietti got his $9m was unrepeatable – the following year, Deutsche’s profits halved.  The company has needed to radically cut costs and leverage and downsize its trading operations.  No wonder banks defer compensation and claw it back these days.

A demonstration of how quickly things can change was given by Tidjane Thiam yesterday.  At a conference, the Credit Suisse CEO said that “You can feel the nervousness across markets”, and that trade tensions associated with the US administration’s rhetoric and behaviour meant that every piece of news was knocking market sentiment, particularly in the emerging markets.

But … it was only last week that Thiam was “calm” about the prospect.  “I never really worry about emerging markets”, he said, adding that emerging markets are fine as long as they are well-managed.  So he is simultaneously calm and worried?  Or he can feel the nervousness in markets while maintaining Zen-like detachment himself?  Or possibly, Thiam has enough common sense to be able to read a chart on a terminal, so he knows that times are good, but he is so utterly committed to a “wealth generation in Asia” thesis that there is no way to back away from it, so he might as well put a brave face on it.  It’s perhaps just as well that his stock management headshot has such an ambiguous facial expression that it can be used just as well for “nervous” as “calm” stories.


Arki Busson’s LumX (the former Gottex) has filed its interim report and things are not pretty; more mandate losses and now half the company’s earnings are attributable to two contracts.  Although the chairman’s statement says “I am encouraged by the growth prospects”, going concern status is going to be dependent on shareholder support if some more revenue doesn’t show up. (Financial News)

The UK’s immigration policy post-Brexit will be based on employer sponsorship of “high-skilled” (high earning) employees, but also of their families.  Are banks going to be willing or able to sponsor the families of their expat staff in London? (Telegraph)

And on a related note, the City Minister has been addressing meetings at the Conservative Party conference, saying that the financial sector needs its own “friction free” immigration regime. (Financial News)

Blood is thicker than water – three brothers are on trial in Paris for money laundering.  One is a former director of HSBC in Geneva and one used to run a wealth management firm.  Their defence – that they believed the money came from tax evasion rather than drugs – is novel. (Bloomberg)

“Bitcoin Suisse”, a crypto financial services provider, has hired Lothar Cerjak from the better-known Credit Suisse, to be its “Head of ICOs” (Finews)

Yann Gerardin, head of CIB at BNP Paribas, has been promoted to deputy COO (FT)

Natixis’ new CEO is reiterating the bank’s “multi-boutique” strategy of building its network by taking financial stakes in M&A and asset management boutiques – current acquisition priorities are in Asia and in private debt (FT)

From the “dull but worthy” department – the succession race for the chair of the Financial Stability Board, the world’s top regulator, is down to two – Randall Quarles of the Fed and Klaas Knot of the Dutch central bank.  An appointment from the USA might both temper the “America first” philosophy of the US administration and bring some of the de-regulatory domestic agenda to the international stage. (Bloomberg)

Deutsche Bank’s investment banking strategic revamp is beginning to show some details … unfortunately, they are such old familiars as “reorganise product groups round client sectors” and “try to demonstrate the benefits of a one stop shop”.  If you can’t do something new, do something different, maybe (Handelsblatt)

Kevin Hassett, a Trump administration advisor, has accused Goldman Sachs of slanting its economic research in order to deliver benefits to the Democratic Party in the forthcoming elections (CNN)

A new “Diversity In Finance” initiative is to be launched this month with 200 founder organisations including JPM, Citi and Fidelity (Bloomberg)

David Solomon says that the best thing about being a DJ is that it gives his employees something to make small talk to him about.  Also gives profile-writers something to say … (Business Insider)

An interview with Howard Marks on the state of the cycle, with cautious comments about distressed debt (Axios)

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AUTHORDaniel Davies Insider Comment

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