Morning Coffee: Goldman Sachs’ Powerpoints of shame for an ex-employee. What on earth does this mean for Deutsche Bank?

If you get on the wrong side of a big bank, you can expect that they’re going to say some mean things about you in private.  And if you’re involved in serious regulatory trouble, you might find that your employer wants to distance itself and paint you as a single rogue bad apple.  Put those two together, multiply them up to the scale of the 1MDB scandal and you could imagine that Goldman Sachs might have some cutting remarks to make about Timothy Leissner, the former partner who is currently being charged with bribery and money laundering in the 1MDB case. But you might not have guessed quite how aggressive things have got.

Apparently, Goldman have drawn up a Powerpoint presentation to give to federal prosecutors, detailing every bad thing they could think of to say about Mr Leissner.  They are said to present evidence that he might have been a bigamist, for example.  The NT says there another two slides detailing times when it appears Mr Leissner might have converted to Islam (possibly in order to date wealthy Malaysian women).  As well as detailing his relationships with colleagues and clients, they suggest he might have got a mail-order PhD from a bankrupt university.  As unfavourable former employer references go, it’s quite a long way from “performed adequately despite timekeeping issues” or “passionate and occasionally outspoken in meetings with colleagues”.

The gambit seems to be to try to convince the authorities that Mr Leissner was no ordinary rogue; that he was so deceitful that it’s plausible to believe that he evaded all of Goldman’s controls and checks.  This is obviously vital for the bank to prove, given how high up the management chain the 1MDB deals were approved and lauded.  To have promoted a "wild man" to partner level without a clue what was going on is obviously embarrassing, but it’s much less damaging than any implication that Goldman had an idea that Mr Leissner was a bad lot but turned a blind eye because he brought the deals in.  There’s also an element of self-defence, since Goldman don’t yet know what Leissner might be planning to say, but should have a fair guess that it might be something they would want to preemptively discredit.

So, unedifying though it is, there’s a strategy here. Cutting loose a former senior banker in such an emphatic fashion and then taking the low road in terms of attacking his personal life is unlikely to generate much goodwill. However, it's proof how serious things have got with respect to the 1MDB case.

Separately, they’re not rumours any more – albeit still anonymously, European regulators are coming out and saying it: they want someone to take over Deutsche Bank. The people at the ECB and BaFin are prepared to discuss specific merger scenarios. The German finance ministry has even asked the banking supervisory authority to “run the numbers” on a number of partners and scenarios, for all the world as if it was an M&A advisory shop.

The trouble is, the regulators have done the same analysis as everyone else and got the same answers. Their analysis suggests the ideal merger partner from Deutsche’s point of view would be a European rival and not a local competitor. The regulators don't say so, but we'd suggest Deutsche's ideal spouse would be UBS. The only catch is that there’s no evidence that UBS is interested in the large German on the other side of the room. After spending ten years ridding UBS of a life-threatening legacy asset portfolio and an oversized and inefficient investment bank, it’s hard to see Sergio Ermotti or any successor wanting to take on exactly those two things.  Or at least, the only way one could imagine this happening would be if the price was overwhelmingly attractive, at a level which would leave very little value for Deutsche shareholders.

This leaves Commerzbank, whom everyone always thought Deutsche would marry, but which health problems of its own. - What problem, exactly, would a Deutsche/CoBa merger solve?  The branch network’s overlap is not as great as one might think the integration problem would be massive given both banks known serious systems issues, so big cost synergies could hardly be relied on.  And without truly stunning synergies, all the merger would create would be a bigger version of the same rather unattractive bank.

It looks like, in the absence of any better ideas, the most likely outcome is stasis.  The German authorities have not yet given up on the idea of having a national champion, while the ECB and its supervisors still have a long term aim of restructuring the industry with cross-border mergers.  But you can’t just have “consolidation” in the abstract; you need to come up with an actual deal, and it has to be executable.

This means that Christian Sewing will most likely get his wish and be given a bit of time to try to succeed where five previous CEOs have failed (Cryan, Jain/Fischen, Ackerman and Breuer), getting Deutsche Bank to have an acceptable management information system and using it to bring costs under control.  While preserving the franchise and not allowing the funding cost to rise, naturally.  If he can pull it off, Deutsche will be in a much stronger position to look for merger partners.  Although, if all those things could be done, Deutsche wouldn’t necessarily need a deal after all.

The trouble is that although Sewing might not need to worry about merger pressure, he’s likely to remain under other sorts of pressure. Deutsche is still an ongoing worry for the central bank and treasury, not least because it is so systemic and so potentially vulnerable to a shift in confidence from its corporate transaction banking clients.  Anything which makes Deutsche look vulnerable to that audience - especially under-performing FICC operations outside of Europe – could put Deutsche under subtle pressure to downsize a lot more than it has already.

 

Meanwhile ...

There's some more detail on the Orcel/Santander story, including the key detail that much of Mr Orcel’s UBS stock will now vest; the clawback was triggered by moving to another bank rather than just by resigning.  Interesting to see that both sides of the deal were driven by PR concerns; Axel Weber felt it would look bad to Swiss shareholders to see a big payout made to a departing employee while Ana Botin couldn’t live with the way that a €50m number would look in Spanish headlines. Orcel is apparently devastated according to friends and believes his career is in ruins (FT)

Citi has a gender pay gap of 29% globally, with minority employees in the USA earnings 93% of the average compensation of non-minorities (Reuters)

Better news for Goldman Sachs at the Q4 results stage – despite suffering the same issues in fixed income trading that have dogged the last quarter, the stellar performance from IBD meant they were ahead of expectations (Bloomberg)

Who’s the fake Fink?  Some as yet unidentified hoaxers sent a letter to media outlets (several of which printed it), claiming to be an official Blackrock “Dear CEO” and pledging divestment and shareholder activism against companies which didn’t meet ambitious climate goals. (Financial News)

If you have friends you lost touch with at Morgan Stanley, here’s the list of 145 new Managing Directors to see if it’s time to send a congratulations note (Financial News)

Crispin Odey is not opening the champagne yet despite a very strong year; he’s still 90 per cent below high watermark (Bloomberg)

The strong growth of private equity investment in Spain is causing tensions as local firms get the asset stripping treatment (FT)

Tired hedge fund manager calls it a day. "To do this day after day was just not fun anymore. It’s been eating away at me. You’re constantly feeling the pressure to perform on a monthly basis.” (Bloomberg) 

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