It’s always ominous to read in the newspapers that “investors” are losing patience with a bank and think that “bold action” is what’s needed. A news story in the FT has summarised the chorus of disappointment with Citigroup – not really that things were too bad, or that they weren’t getting better, just that they weren’t getting better fast enough compared to Goldman Sachs or JP Morgan. And now we’re getting news of a big restructuring in the equities division, which will also bear the brunt of potentially hundreds of job cuts in the trading operations overall.
It’s funny how “bold” action hardly ever seems to mean taking more risk, hiring top talent and leaning into the market (with the possible exception of Jes Staley’s Barclays). When investors talk about bold strategy, they usually mean boldly firing people and boldly taking apart good franchises. The same thing, of course, happened at Deutsche Bank, and it nearly crippled the bank while not exactly delivering the goods for the activist shareholders who had demanded it. Citi isn’t Deutsche, of course – it has a strong domestic business and surplus capital – but the pattern of behaviour is not wholly unfamiliar.
The example of Deutsche Bank (and UBS before it) suggests that if you are going to make cuts in a trading business, go big or go home. Deutsche in particular suffered from a vicious cycle of deciding that the cost/income ratio was too high, then firing a lot of people to cut costs, then seeing revenues crater, and then looking out a year later and seeing the same cost/income ratio at a lower level. Downsizing programs destabilise businesses; it’s been known for years that when you fire a hundred people, another 50 leave, and the 50 that leave are usually the ones you desperately wanted to keep.
Cutting 10% of a franchise, as the Bloomberg story suggests, is a strategy with a pretty bad track record. The investment bankers at Citi, who recently announced a pretty big hiring program, are also likely to feel the knock-on effects. Weakening the equities operation and its relationships with institutional clients may make their jobs more difficult.
Why do banks do this? In Citi’s case, it seems like it might be driven by the desire to reach a 12% RoE target, to which Mike Corbat is heavily committed. Trading businesses are cyclical, and the current cycle of risk-aversion and low volatility has been particularly long and deep. It certainly might be the case that some business lines, including cash equities, have seen a structural rather than a secular change, and need to have capacity removed. But Citi wasn’t and isn’t a marginal player; the equities division in particular has been gaining market share in Coalition data for a few years and did better than either JP Morgan or Bank of America in Q2. Now it’s going to be put through a big cost-cutting exercise, and given a triple co-head management structure as it merges with Citi’s Prime, Futures and Securities Services (PFSS) division. This isn’t a Deutsche-level red flag for employees, but it might be worth paying attention to.
Elsewhere, readers might remember that a few years ago, venture capital firm Sequoia Capital was criticised for not having any female partners in the US. The story of how it recruited Jess Lee in 2016 certainly suggests that it wasn’t for lack of effort. They booked a lunch meeting with her in a café and…
“When she showed up, she tried not to stare at two customers at a nearby table dressed head-to-toe as characters from Toy Story. After a few minutes, Woody and Buzz Lightyear held up a watercolor of the cowgirl character, Jessie, and other toys from the movie. Words beneath read: “Will you join US on a new VENTURE?” The toys then removed their headpieces”
… and they were two Sequoia partners. Although many might think that this sort of thing might explain why they hadn’t been able to recruit any women before, it was in fact a perfectly calibrated reference to Ms Lee’s “cosplay” hobby and she went for it. Although we can’t see this catching on in finance, it makes all those evenings in wine bars plying star traders with champagne seem pretty unimaginative.
Citigroup apparently hired three convicted criminals between 2010 and 2017, according to a settlement made with Finra. This was due to failures in screening for brokerage jobs, and although the filings do not record whether anyone dressed up as Buzz Lightyear to seal the deal, we presume not. (Bloomberg)
Applications to the Deutsche Bank graduate program are down by over 25%, although the bank still received 80,000 resumes from young people who want to join. It might not even be that bad an idea; noticeably, Deutsche didn’t slow down graduate recruitment last year despite having plenty of troubles back then. (Financial News)
The civil lawsuit version of the FX-rigging case has now been filed in London, with a former chief executive of the pensions regulator as the lead plaintiff. (Reuters)
It appears that the efforts of Deutsche Bank’s Australian equities analysts and sales-traders to organise a whole-team move to local competitors Wilsons has fallen through. (AFR)
Whither Goldman? It’s always a popular topic to debate, but does the bank need to decide whether the future lies in recurring and predictable banking-type earnings through Marcus and transaction banking, or in being a mini-Blackstone and making money through strategic investing? (Euromoney)
Stress and depression are among the major causes of long-term sick leave at the Financial Conduct Authority in London, with more than 100 employees signed off between 2015 and 2018. (Financial News)
JP Morgan is parking its tanks on the lawns of UBS and Credit Suisse, with a big push into wealth management in Germany (Bloomberg, and a Swiss view from Finews).
Acidic thoughts on the “Breakfast bankers”, the proliferation of “vice-chairmen” in investment banking who are kept on because of former importance but who don’t seem to do anything but eat expensive meals (Finews).
Image credit: Robert Podlaski, Getty