Morning Coffee: Deutsche Bank’s worst idea yet? And a lifeline for sell side research

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If you were to think of the worst possible personnel decision that Christian Sewing could possibly make, what elements would go into it?  Something which would at a single stroke, exacerbate all the regulatory problems, worsen Deutsche’s reputation for a toxic management culture and take a step backward for diversity and representation?  If the WSJ’s reporting on a “high level shake up” currently under consideration is correct, it would be hard to think of something more destructive than the plan which Deutsche’s board is currently considering.

There are two senior executives who are apparently on the brink of being pushed out; Tom Patrick, the regional CEO for the Americas and Sylvie Matherat, the Chief Regulatory Officer.  These are likely to be related issues; in great measure, Deutsche’s U.S. problems are its regulatory problems and vice versa.  The bank has been hit by a stream of bad news relating to its financial crime prevention systems, and it’s understandable that Christian Sewing is not happy about it.

What’s less comprehensible is why anyone would consider this to be Sylvie Matherat’s fault.  Deutsche’s big recent financial crime failings have been the Russian mirror trades scandal, which related to business between 2012 and 2015, and its relationship with Danske Bank Estonia, which was shut down in 2015. Since Matherat only joined Deutsche in 2014, and was promoted to the management board in 2015, it seems like the worst kind of scapegoating to hold her responsible for these problems.  It's a move that seems unlikely to impress the Federal Reserve. It’s likely to further damage relations with European regulators. And, by putting Deutsche bank to a 100% male management board, it’s not a good look overall.

Tom Patrick also looks like a scapegoat.  It’s certainly true that Deutsche in the Americas is a very troubled franchise.  It’s also clear that its problems did not suddenly begin in August 2017, when Patrick was appointed.  During that time, he has had the job of trying to supervise a complete overhaul of Deutsche’s technology and information systems, while the corporate centre has been cutting budgets.  If and when he goes, Mr Patrick’s replacement will be the fourth regional CEO in three years. That’s less time in post than a Premier League manager and makes it awfully difficult to see why anyone else (even an internal appointment; Patrick was previously a quite well-regarded head of equities) would take this job on.

It’s hard, therefore, to escape the sense that short term thinking and shooting the messenger has worked itself into Deutsche Bank’s DNA.  Christian Sewing is in the job mainly because the supervisory board lost patience with John Cryan.  Now he seems to be reproducing the same decision pattern one level down the management chain.  The underlying problem, arguably, is that there’s a reluctance to face up to the fact that Deutsche Bank’s problems are deep seated; the overlapping mess of complex business lines and inconsistent technologies were built up over two decades and can’t be set right in just a couple of years, particularly if the leadership keeps changing....

Separately, it would be something of an irony if one of the first consequences of Brexit in the investment banking industry was that European firms were able to free themselves from the dead hand of excessively burdensome UK regulations.  But that might happen, if Robert Ophèle of the French securities regulator has his way.

The regulation in question is the hated “MiFID 2 research regime”, the rule which forces European – and, increasingly, global – brokerage firms to charge separately for research provided, rather than giving the research away and making a profit on brokerage commissions.  Since being implemented at the start of the year, this has had a drastic effect on sell-side revenues, driving a number of brokerages out of business or into fire-sale mergers.  And it was always a particular enthusiasm of the British Financial Conduct Authority; other European regulators were either lukewarm or actively opposed to it.  Now Mr Ophèle is publicly saying that the rule hasn’t worked for companies or investors and that it ought to be reversed in the first review of the legislation.  This might be a lifeline to small equities and fixed income houses, and of course another incentive to do business in Paris rather than London.


Demonstrating how hard the MiFID research rules are hitting, 82% of global buyside firms are using fewer research providers this year, with as many as a third taking the unbundled approach globally, according to an ICMA survey of fixed income investors. (Markets Media)

As with several recent cases, the length and expense of a regulatory investigation can end up being a punishment in and of itself.  Tim Hayward of GAM has been suspended for more than two months now without any public statement (Finews)

A headhunter survey suggests hedge fund compensation is down by an average of 10%, mainly due to weak performance across the industry.  It’s noted that some marquee names in the long/short equity space have been particularly badly hit. (FT)

Amidst a number of other issues in its article on Facebook, the Economist notes that employee morale is suffering badly, with the workplace atmosphere described as “Horrible” on career reviewing apps (Economist)

Ten big players in cryptocurrency trading (including Mike Novogratz) have formed the Association for Digital Asset Markets, a trade association aimed at promoting a code of conduct and losing the “wild west” image. (Bloomberg)

But Goldman Sachs still thinks that there are too many regulatory problems associated with the space for it to be able to offer custody services for clients’ crypto assets (Bloomberg)

A review of the hiring at GS compared to UBS over the last year (Business Insider)

And is this a sign of market saturation?  A crypto and blockchain conference being held in North Korea (Finews)

The UBS Evidence Lab alternative-data team are now opening up and marketing their insights to external clients (Institutional Investor)

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