Morning Coffee: Angry words at UBS, and when the boss who just fired you needs one last favour

A detailed account from Finews suggests that the UBS succession saga is putting serious strain on the relationship between CEO Sergio Ermotti and Chairman Axel Weber.  It all seems to have been triggered by the fundamental paradox of succession planning – how do you begin a search for the next chief executive, without undermining the incumbent?

This is never easy, but in an industry like investment banking it’s even more sensitive.  Banking is built on personal franchises, franchises are made out of relationships and business relationships (when you look through all the golf trips and opera tickets) are largely based on a surprisingly cold-hearted assessment of what favours people can do for each other over the long term.  Once you draw attention to the fact that a career is getting close to its end, you upset that balance and the damage to a lame duck can be severe, in terms of practicalities as well as egos.

That’s what seems to have happened between Weber and Ermotti.  In an appearance on Bloomberg TV, the chairman declared that he and Ermotti were at a "very early stage" of discussing Ermotti's successor, thereby setting the chase in motion in a particularly public way.  Weber has, according to the reports, now apologised for these comments in a private “clear the air” meeting, but the damage is done.  Ermotti is certainly feeling sensitive; a couple of weeks ago it seems that he registered a new Twitter account specifically for the purpose of responding to a press story that hadn’t even been published yet about potential changes in the Wealth Management leadership.

A spiky, personal top level conflict like this is unlikely to be good for business, particularly if it plays out in such a public way with leaks coming from top level meetings all the time.  But it might be impossible to avoid, as there’s a fundamental battle line to be drawn between insiders and outsiders.  Ermotti has been at UBS since 2010, almost exactly as long as Weber.  But he’s a career investment banker (and a Swiss national), while Weber is an ex-academic who came to UBS from being President of the Bundesbank.  Unsurprisingly, Ermotti has a network within UBS of ex-colleagues from his career, although the most famous of them (Andrea Orcel) is no longer present.  Also understandably, Weber is keen to fill the top-level vacancies left by Orcel and former private banking head Joerg Zeltner with senior hires, rather than promoting Ermotti’s favoured inside candidates. 

In the longer term, there’s the question of whether Sergio Ermotti will succeed Weber as chairman. But there’s also a deeper question of what kind of institution UBS really is.  Back in 2012, the strategy was clear – it would be a wealth manager with a small and synergistic investment banking franchise.  As time has moved on, however, the investment bank has built back and now supports profits while private banking margins continue to struggle.  The succession battle, messy as it is becoming, is a battle for what kind of jobs there are going to be in Swiss banking for decades to come.

Separately, however strained the conversation was in the UBS boardroom, it can’t have been as awkward as the phone call which took place between Chris Rollins and Michael Daffey of Goldman Sachs in April 2017. Rollins had been a managing director and co-head of EMEA trading execution, working under Daffey, until he got involved in a failed trade involving Lars Windhorst, who at the time wasn’t an approved counterparty for GS. Shortly after Rollins was fired, though, it became clear that he had believed that he had compliance approval to arrange the trade on an agency basis with no direct risk for Goldman Sachs, and that if that belief were to be followed up in court, all sorts of issues relating to senior Goldman staff’s relationship with the controversial German financier might be dragged out in public (spoiler alert: as indeed they have been).

And so an awkward call was made, with Daffey turning on the charm, offering immediate delivery of Rollins' withheld Goldman bonuses, and saying “I want this buried ... I don’t want the lawyers to kind of run amok with this, Chris, I really don’t”.  For Rollins, the prospect of a day in court was clearly more attractive, though; the litigation is ongoing. 

Daffey's call is not uncommon practice in the industry; it neither constitutes an admission of blame nor precludes either side from lawyering up later.  It’s a sort of exploratory process between two guys who used to be good friends, to see if there’s enough of the relationship left to avoid a process that’s usually highly negative-sum.  The fact that Rollins went to Bloomberg with details of the conversation means Daffey is probably regretful that he ever picked up the phone.

Meanwhile ...

The latest survey puts the count of jobs moving due to Brexit at 2,000, down from initial estimates as high as 10,000.  The long term slow burn effect might be much greater though according to the London firms surveyed (Reuters)

Although smallcap specialist Numis reckons that Brexit is taking its toll on revenues (FT)

And HSBC apparently plans investment banking job cuts to be announced this week (Reuters)

The David Solomon review of Goldman Sachs’ trading operations has reached the historic J Aron franchise, which gave the bank its last CEO Lloyd Blankfein.  It appears that commodities trading is scheduled for significant cuts. (WSJ)

SocGen’s prop trading operation, Descartes, is closing in Hong Kong and may be shut down altogether (Les Echos)

Edward Bramson’s Sherborne Partners have put forward a resolution for the AGM, demanding a board seat (Financial News)

More from the Barclays Euribor trial; spurning the use of Bloomberg chatrooms, it’s alleged that traders just used to yell their requests for manipulation across the trading floor (Bloomberg)

One face that won’t be seen in Venezuela, apparently – Lee Buchheit, the colossus of sovereign bankruptcy law for the last two decades, is retiring (Financial Times)

Winton Capital’s David Harding has made the biggest donation in the history of Cambridge University at £100m, the majority of which is to be used to fund scholarships for more mathematicians. (Financial News)

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