Financial Times Survey: Banks" Brexit Relocations By March 2019 Much Lower Than Feared

In the run-up to the recent agreement on phase I of Brexit, there was mixed news on the extent to which jobs in the City of London would be relocated to other European hubs, primarily Frankfurt. On one hand, we discussed the meeting between US Commerce Secretary, Wilbur Ross, and executives of JPM, Goldman, HSBC and other banks at Wilton’s restaurant during his trip to London in early November. The banks warned that they were close to a “point of no return” on moving jobs.

A group of large financial institutions with big London operations, led by Wall Street’s pre-eminent banks, have told the US commerce secretary that Britain’s unstable government and slow progress in Brexit planning may force them to start moving thousands of jobs out of City in the near future. The warnings came on Friday during a closed-door meeting between executives from the banks, which included JPMorgan Chase, Goldman Sachs and HSBC, and Wilbur Ross during the US commerce secretary’s visit to London, according to people briefed on the discussions.

A week earlier, we reported the head of Swiss bank, UBS, saying that the possibility that a fifth of its 5,000-strong UK workforce would be shifted was now unlikely to materialise following some “regulatory and political clarification about what we need to do”.
 
We can now, thanks to a survey by the Financial Times, get a better idea of the likely London exodus by March 2019 after the newspaper reviewed public statements by fifteen of the UK’s biggest financial institutions and conducted interviews with more than a dozen executives about Brexit plans. According to the newspaper, the number is…

The UK’s biggest international banks are set to move fewer than 4,600 jobs from London in preparation for Brexit — just 6 per cent of their total workforce in the financial centre — according to Financial Times research.

 

The FT analysis contrasts with consultants’ original claims that tens of thousands of jobs could move from London after Brexit — including an EY study this week that claimed 10,500 could leave on “day one”.

Some bankers say the lower estimates emerged as they thought through how many jobs and operations would need to move to the EU if the UK loses access to the bloc’s single market. “Every city wants thousands of people, but what are they going to do?” said one senior executive at a large US institution, adding that the thousands of people sitting in his London office “cover clients” who will mostly be remaining in the UK.

Two banks in particular, Deutsche Bank (not surprisingly) and JPMorgan Chase, had stated that several thousand jobs could move, although the FT estimates that the number is likely to be only several hundred. It’s the same with Goldman, despite Lloyds Blankfein’s famous tweet about spending “a lot more time” in Frankfurt.

In the case of Deutsche Bank, where Sylvie Matherat, head of regulation, publicly said up to 4,000 jobs could move, the FT estimates that just 350 jobs may leave by April 2019. The figure amounts to 5 per cent of Deutsche’s London headcount, a proportion broadly in line with other big banks. At JPMorgan, where chief executive Jamie Dimon warned before the Brexit vote of up to 4,000 London job losses, the number leaving before April 2019 is set to be closer to 700. Goldman Sachs, which has taken a new office in Frankfurt that could accommodate 1,000 people, expects to move fewer than 500 from London. HSBC is still planning to move “up to 1000 people”, although its chief financial officer recently said the figure could fall.

So the initial London exodus by March 2019 will be fairly modest and the banks have the prized transition period of two years. However, some banks are leaving the door open for further relocations in the aftermath of Brexit. According to Rob Rooney, CEO of Morgan Stanley International the real Brexit story will only be apparent “three to five years out”. As the FT explains.

Several banks say they are planning to move relatively few people in the immediate aftermath of Brexit because it will take time for their EU operations to build up. They expect to have very small balance sheets when the EU entities begin handling client business on April 1, 2019, and to be able to run some of the risk and support functions for those small EU entities from London.

Next year, banks are likely to begin “repapering” some clients to their new EU entities. The FT noted that one bank EMEA CEO said that he expected the ECB to push for more “market risk to be run onshore”.

However, a key question will be, where do the clients want to do business? We could be wrong, but our guess is that the majority will opt for the status quo if at all possible. The EU has already inflicted the nightmare of MiFID II on them.
 

Ex-HSBC Trader Involved In Front-Running Scandal To Be Extradited To U.S.

It"s not shaping up to be a great week for a group of former HSBC FX traders who decided to front-run a massive $3.5 billion currency trade placed by one of their clients and net their bank some $8 million in illicit profits in the process.  Earlier this week, Ex-HSBC currency trader Mark Johnson, who was unwittingly captured on an audio recording saying "I think we got away with it," was convicted by a jury in New York of fraud. 

Now we learn that Johnson"s partner in crime (allegedly, of course), Stuart Scott, has lost his court battle in the U.K. and will be extradited to the U.S. to face charges.

Not surprisingly, Scott expressed some "disappointment" with the ruling shortly after being dismissed from court.

*SCOTT SAYS HE IS DISAPPOINTED BY EXTRADITION RULING

*SCOTT SAYS U.S. CASE IS FLAWED, INACCURATE

As we"ve noted previously, Mark Johnson was arrested at New York’s Kennedy Airport in 2016 before he could return to the U.K. but Stuart Scott has remained free at his home in the London suburbs...until now.  Per Bloomberg:

Mark Johnson, HSBC’s global head of foreign exchange cash trading in London, was taken into custody at John F. Kennedy International Airport Tuesday and is scheduled to appear before a judge in federal court in Brooklyn Wednesday morning, said the people, who asked not to be named because the case hasn’t been made public. He’s charged with conspiracy to commit wire fraud, the people said.

 

According to Bloomberg, Johnson’s arrest comes more than a year after five global banks pleaded guilty to charges related to the rigging of currency benchmarks. HSBC, which wasn’t part of those criminal cases, in November 2014 agreed to pay $618 million in penalties to U.S. and British regulators to resolve currency manipulation allegations. HSBC, which still faces investigations by the Justice Department and other authorities for the conduct, has set aside $1.3 billion for possible settlements, according to an August filing.

 

Rob Sherman, an HSBC spokesman, and Peter Carr, a Justice Department spokesman, declined to comment.

A few weeks ago, details of court filings began to leak from Scott"s British extradition case which allowed us to learn exactly how much each HSBC trader made for his trading book in the illicit scheme that netted a total of $8 million in profits...Scott took second place with a total profit of $585,105.  Per Bloomberg:

"The defendant personally obtained over $500,000 profit," the U.S. Justice Department, represented by British lawyer Mark Summers, said in written arguments prepared for the hearing. "The offenses of which he is accused are highly serious. They involve a systematic and organized conspiracy to defraud, committed in breach of trust."

 

Scott was charged, along with his ex-boss Mark Johnson, by the Justice Department in July 2016 with using insider knowledge to front-run a $3.5 billion currency deal by Cairn Energy Plc that made the bank $8 million. Johnson is on trial in New York and a jury there could begin deliberations this week.

Here"s how everyone else made out per the DOJ:

For those who haven"t followed the story closely, according to the original DOJ complaint, HSBC was selected by Cairn Energy Plc to execute a foreign exchange transaction – which was going to require converting approximately $3.5 billion in sales proceeds into British Pound Sterling – in October 2011.  But, before executing that trade, he tipped off a bunch of HSBC traders who loaded up their proprietary accounts with Pounds just before the massive trade sent the currency higher.

“As alleged, the defendants placed personal and company profits ahead of their duties of trust and confidentiality owed to their client, and in doing so, defrauded their client of millions of dollars,” stated United States Attorney Capers.  “When questioned by their client about the higher price paid for their significant transaction, the defendants wove a web of lies designed to conceal the truth and divert attention away from their fraudulent trades.  The charges and arrest announced today reflect our steadfast commitment to hold accountable corporate executives and licensed professionals who use their positions to fraudulently enrich themselves.”

 

“The defendants allegedly betrayed their client’s confidence, and corruptly manipulated the foreign exchange market to benefit themselves and their bank,” said Assistant Attorney General Caldwell.  “This case demonstrates the Criminal Division’s commitment to hold corporate executives, including at the world’s largest and most sophisticated institutions, responsible for their crimes.”

Of course, we"re sure this is all just an effort to "criminalize behavior that is normal"...at least on Wall Street. 

Ex-HSBC Currency Trader Convicted Of Fraud In Massive Front-Running Scandal

Ex-HSBC currency trader Mark Johnson, who was unwittingly captured on an audio recording saying "I think we got away with it," has just been convicted by a jury in New York of fraud for front-running a $3.5 billion transaction that netted his firm some $8 million in illicit profits.  Per Bloomberg:

Former HSBC Holdings Plc currency trader Mark Johnson was found guilty of fraud for front-running a $3.5 billion client order, a victory for U.S. prosecutors as they seek to root out misconduct in global financial markets.

 

He was convicted on Monday after a month-long trial in Brooklyn, New York.

 

Johnson was the first person to be tried since the global currency-rigging scandal that resulted in global banks paying more the $10 billion in penalties. The charges stemmed from HSBC’s execution of a trading order from Cairn Energy Plc in 2011 to convert the proceeds of a unit sale from dollars into pounds.

 

"This sends a signal to traders and banks that this type of behavior is absolutely inappropriate and will be pursued by the government," Michael Weinstein, a former Justice Department trial attorney, said. "That’s a big hammer over the banks -- it may force them to monitor and self-regulate their people."

For those who haven"t followed this particular story, Mark Johnson was arrested at New York’s Kennedy Airport in 2016 before he could return to the U.K. following a nearly 3-year investigation into efforts on the part of several large investment banks to rig FX markets but Stuart Scott has remained free at his home in the London suburbs pending the outcome of the extradition proceedings.  Per Bloomberg:

Mark Johnson, HSBC’s global head of foreign exchange cash trading in London, was taken into custody at John F. Kennedy International Airport Tuesday and is scheduled to appear before a judge in federal court in Brooklyn Wednesday morning, said the people, who asked not to be named because the case hasn’t been made public. He’s charged with conspiracy to commit wire fraud, the people said.

 

According to Bloomberg, Johnson’s arrest comes more than a year after five global banks pleaded guilty to charges related to the rigging of currency benchmarks. HSBC, which wasn’t part of those criminal cases, in November 2014 agreed to pay $618 million in penalties to U.S. and British regulators to resolve currency manipulation allegations. HSBC, which still faces investigations by the Justice Department and other authorities for the conduct, has set aside $1.3 billion for possible settlements, according to an August filing.

 

Rob Sherman, an HSBC spokesman, and Peter Carr, a Justice Department spokesman, declined to comment.

According to the original DOJ complaint, HSBC was selected by Cairn Energy Plc to execute a foreign exchange transaction – which was going to require converting approximately $3.5 billion in sales proceeds into British Pound Sterling – in October 2011.  But, before executing that trade, he tipped off a bunch of HSBC traders who loaded up their proprietary accounts with Pounds just before the massive trade sent the currency higher.

“As alleged, the defendants placed personal and company profits ahead of their duties of trust and confidentiality owed to their client, and in doing so, defrauded their client of millions of dollars,” stated United States Attorney Capers.  “When questioned by their client about the higher price paid for their significant transaction, the defendants wove a web of lies designed to conceal the truth and divert attention away from their fraudulent trades.  The charges and arrest announced today reflect our steadfast commitment to hold accountable corporate executives and licensed professionals who use their positions to fraudulently enrich themselves.”

 

“The defendants allegedly betrayed their client’s confidence, and corruptly manipulated the foreign exchange market to benefit themselves and their bank,” said Assistant Attorney General Caldwell.  “This case demonstrates the Criminal Division’s commitment to hold corporate executives, including at the world’s largest and most sophisticated institutions, responsible for their crimes.”

As we"ve noted over the past couple of weeks, tidbits of the prosecution"s case has made it"s way into the media recently, including reports last week that Johnson used the code phrase "my watch is off" to trigger trading by HSBC traders all around the globe.  Meanwhile, as Law360 recently pointed out, jurors also had the opportunity to hear some rather damning recordings of Johnson"s phone conversations with traders, including the one below in which he says "I think we got away with it."

Prosecutors played a recording of a call between Johnson and Stuart after the 3 p.m. fix as they debrief, with Johnson telling Stuart, “I think we got away with it,” but Stuart replies that HSBC executive Dipak Khot — who acted as the go between with Cairn and HSBC — thinks otherwise and suspects that Cairn will protest.

 

Johnson in turn argued that Cairn is still in a better position than it would have been if it had taken any other offers to execute the deal in alternate methods as opposed to the fix. “They don’t really have a lot of room to complain,” he said on the call.

 

But as Cahill was trading ahead of the 3 p.m. fix on the day of the transaction, Johnson sounded more concerned about “ramping it up” too much. Jurors heard another recording of a call between Johnson and Scott, with Scott talking to Cahill in the background as he trades, in which Johnson cautions against spiking the price of sterling too high out of concern that Cairn will "squeal."

 

“Frank, Frank if it rates above 30 at the fix, I think they’ll start to ah ... if you need to buy them, obviously, but ideally don’t ramp it above 30,” Scott tells Cahill. “Do what you need to do, but ... sorry I know I’m probably not helping much...I’ll leave you alone.”

 

“Is he getting a bit tetchy?” Johnson asks.

 

“No, he’s not,” Scott replies.

 

“He can’t, fucking moaning bastard,” Johnson said. “I do all the work and he gets all the glory.”

 

Jurors heard that days later in a call with HSBC forex trader Ed Carmichael in Hong Kong, Johnson told him that HSBC’s London forex trading desk, “just had a bonanza” on the Cairn deal, and described his response when Cairn sought an explanation on the less than stellar result for the oil and gas developer.

Of course, when HSBC"s client complained about their less than stellar execution price, Johnson admits that he blamed all the usual suspects: "Russians, other central banks, all that sort of stuff."

“And they said, well you know it jumped up a bit, who else was buying? And we said the usual Russian names, other central banks, all that sort of stuff,” Johnson said on the call.

As we noted last week, nearly a dozen HSBC traders around the globe netted over $8 million in profits by allegedly front-running their own client.

Of course, while the DOJ will undoubtedly celebrate their conviction in the media, there is little doubt that Mark Johnson"s "pre-hedging" scandal is hardly unique for an industry that has been built on front-running clients.

"I Think We Got Away With It": HSBC Trader"s Fate Left To Jurors After Damning Phone Recordings Revealed

After weeks of testimony, the fate of former HSBC trader Mark Johnson, who stands accused of orchestrating a massive international front-running scheme that netted his firm over $8 million in illicit profits, has been left in the hands jurors.

Over the past couple of weeks, tidbits of the prosecution"s case has made it"s way into the media, including reports last week that Johnson used the code phrase "my watch is off" to trigger trading by HSBC traders all around the globe.  Meanwhile, as Law360 recently pointed out, jurors also had the opportunity to hear some rather damning recordings of Johnson"s phone conversations with traders, including the one below in which he says "I think we got away with it."

Prosecutors played a recording of a call between Johnson and Stuart after the 3 p.m. fix as they debrief, with Johnson telling Stuart, “I think we got away with it,” but Stuart replies that HSBC executive Dipak Khot — who acted as the go between with Cairn and HSBC — thinks otherwise and suspects that Cairn will protest.

 

Johnson in turn argued that Cairn is still in a better position than it would have been if it had taken any other offers to execute the deal in alternate methods as opposed to the fix. “They don’t really have a lot of room to complain,” he said on the call.

 

But as Cahill was trading ahead of the 3 p.m. fix on the day of the transaction, Johnson sounded more concerned about “ramping it up” too much. Jurors heard another recording of a call between Johnson and Scott, with Scott talking to Cahill in the background as he trades, in which Johnson cautions against spiking the price of sterling too high out of concern that Cairn will "squeal."

 

“Frank, Frank if it rates above 30 at the fix, I think they’ll start to ah ... if you need to buy them, obviously, but ideally don’t ramp it above 30,” Scott tells Cahill. “Do what you need to do, but ... sorry I know I’m probably not helping much...I’ll leave you alone.”

 

“Is he getting a bit tetchy?” Johnson asks.

 

“No, he’s not,” Scott replies.

 

“He can’t, fucking moaning bastard,” Johnson said. “I do all the work and he gets all the glory.”

 

Jurors heard that days later in a call with HSBC forex trader Ed Carmichael in Hong Kong, Johnson told him that HSBC’s London forex trading desk, “just had a bonanza” on the Cairn deal, and described his response when Cairn sought an explanation on the less than stellar result for the oil and gas developer.

Of course, when HSBC"s client complained about their less than stellar execution price, Johnson admits that he blamed all the usual suspects: "Russians, other central banks, all that sort of stuff."

“And they said, well you know it jumped up a bit, who else was buying? And we said the usual Russian names, other central banks, all that sort of stuff,” Johnson said on the call.

For those who haven"t followed this particular story, Mark Johnson was arrested at New York’s Kennedy Airport in 2016 before he could return to the U.K. following a nearly 3-year investigation into efforts on the part of several large investment banks to rig FX markets but Stuart Scott has remained free at his home in the London suburbs pending the outcome of the extradition proceedings.  Per Bloomberg:

Mark Johnson, HSBC’s global head of foreign exchange cash trading in London, was taken into custody at John F. Kennedy International Airport Tuesday and is scheduled to appear before a judge in federal court in Brooklyn Wednesday morning, said the people, who asked not to be named because the case hasn’t been made public. He’s charged with conspiracy to commit wire fraud, the people said.

 

According to Bloomberg, Johnson’s arrest comes more than a year after five global banks pleaded guilty to charges related to the rigging of currency benchmarks. HSBC, which wasn’t part of those criminal cases, in November 2014 agreed to pay $618 million in penalties to U.S. and British regulators to resolve currency manipulation allegations. HSBC, which still faces investigations by the Justice Department and other authorities for the conduct, has set aside $1.3 billion for possible settlements, according to an August filing.

 

Rob Sherman, an HSBC spokesman, and Peter Carr, a Justice Department spokesman, declined to comment.

According to the original DOJ complaint, HSBC was selected by Cairn Energy Plc to execute a foreign exchange transaction – which was going to require converting approximately $3.5 billion in sales proceeds into British Pound Sterling – in October 2011.  But, before executing that trade, he tipped off a bunch of HSBC traders who loaded up their proprietary accounts with Pounds just before the massive trade sent the currency higher.

“As alleged, the defendants placed personal and company profits ahead of their duties of trust and confidentiality owed to their client, and in doing so, defrauded their client of millions of dollars,” stated United States Attorney Capers.  “When questioned by their client about the higher price paid for their significant transaction, the defendants wove a web of lies designed to conceal the truth and divert attention away from their fraudulent trades.  The charges and arrest announced today reflect our steadfast commitment to hold accountable corporate executives and licensed professionals who use their positions to fraudulently enrich themselves.”

 

“The defendants allegedly betrayed their client’s confidence, and corruptly manipulated the foreign exchange market to benefit themselves and their bank,” said Assistant Attorney General Caldwell.  “This case demonstrates the Criminal Division’s commitment to hold corporate executives, including at the world’s largest and most sophisticated institutions, responsible for their crimes.”

As we noted last week, nearly a dozen HSBC traders around the globe netted over $8 million in profits by allegedly front-running their own client.

Of course, Johnson would like for you to know that this entire case is just "much ado about nothing" as he never intended to "front-run" his client but rather was just engaging in some innocent "pre-hedging"...which is a new term for us...must be a technical term only used by European FX traders.

Deutsche Bank Forced To Slash Fixed-Income Research Price By Half On Lackluster Demand

One by one over the past several months, Europe"s largest investment banks have each rolled out their new pricing models detailing how they"ll charge for research in 2018 once the new MiFID II regulations go into effect.  Pricing strategies have varied from expensive all-in packages costing nearly $500,000 a year to pay-as-you-go plans that charge for each research report individually.  Here are a couple of recent examples:

That said, ever since the first pricing plans hit the market we"ve maintained that the finance world"s masters of corporate valuation might ultimately find themselves shocked by the bid/ask spread between what they think their daily pearls of financial wisdom are worth versus the value that asset managers are willing to ascribe to those services.  Here"s how we summed it up in one of our first posts on the topic:

Literally no one knows the true "value" of research, not even the investment banks that are selling it.  Up until now, equity research has been treated as a "freebie" given away to institutional clients in return for trading commissions but that is all about to change thanks to the European Union’s MiFID II regulations, which require asset managers to separate trading commissions from investment-research payments.

Unfortunately, at least for the Investment Banks of the world, while the cost of generating equity research may be substantial, it turns out that the true "value", as defined by institutional clients" maximum willingness to pay for reports, may be much less.  Which is shocking given the creativity required to constantly generate new variations of daily reports politely suggesting that you "Buy The Fucking Dip."

But, as banks try to figure out their "value add", the bid ask spread ranges from about $50,000 for a basic, annual fixed income package up to $600,000.  In other words, at least 1 investment bank thinks their research is worth roughly 6 full-time, dedicated junior analysts.

Of course, as we said before, almost any amount of money seems, at least to us, to be too much to have the same people give you the same advice over and over again, namely "buy more stocks, faster."  There, we just summarized 90% of all equity research that will ever be written for the rest of history in 4 simple words and completely free of charge.  You"re welcome.

Now, it turns out that Deutsche has become the first investment bank forced to admit what we"ve known for some time now, namely that the commoditized product they sell into a hyper-competitive, saturated market might not be as valuable as they once thought.  And, to our complete "shock", they"ve been forced to slash their research prices in half as a result.  Per Bloomberg:

Deutsche Bank AG has halved the price of its fixed-income and macro research as competition mounts in the run-up to Europe’s MiFID II regulations, three people with knowledge of its plans said.

The German lender proposes to charge asset managers 30,000 euros ($35,000) a year for up to 10 users, said the people, who asked not to be identified because the information is private. This was cut from the 60,000 euros it had initially planned after other banks revised their prices lower, according to a memo sent to clients. A spokesman for Deutsche Bank declined to comment.

So, what do you get as part of this new 50% off deal?  How about free web access to reports (which is great because the carrier pigeons have been really slow lately) and the ability to actually speak with analysts...is that something that might interest you?

Deutsche Bank’s 30,000-euro package includes web access to written research and contact with analysts, the people said. Deliberations are ongoing and the bank hasn’t made a final decision on the pricing.

The Frankfurt-based lender’s prices are linked to the number of users. Web-only access for up to five people is quoted at 15,000 euros per year, while a package including web access and contact with analysts is 50,000 euros for up to 25 users, one of the people with knowledge of the matter said.

Why do we have a sneaking suspicion that DB isn"t going to be the only bank forced to slash their research prices?

Barclays Seeks $455,000 For 'Gold' Equity Research Package; Includes 'Field Trips' And 'Occasional' 1x1's

Literally no one knows the true "value" of equity research, not even the investment banks that are selling it.  Up until now, equity research has been treated as a "freebie" given away to institutional clients in return for trading commissions but that is all about to change thanks to the European Union’s MiFID II regulations, which require asset managers to separate trading commissions from investment-research payments.

Unfortunately, at least for the Investment Banks of the world, while the cost of generating equity research may be substantial, it turns out that the true "value", as defined by institutional clients" maximum willingness to pay for reports, may be much less.  Which is shocking given the creativity required to constantly generate new variations of daily reports politely suggesting that you "Buy The Fucking Dip."

Be that as it may, with deadlines right around the corner, 2018 offer prices for equity research in Europe are starting to roll in and we suspect there may be a little sticker shock among institutional clients who are used to having unlimited access to all research in return for placing a few trades each year.  Just a few weeks ago we noted that Credit Agricole offered their "Premium Research Package" for the bargain basement price of 400,000 Euros.  Nomura, on the other hand, played the volume game by giving away their "BTFD" reports for just $134,000 a year.

Now, we can add Barclays to the list. Coming in at $455,000 per year for their "Gold" package, it"s hard to imagine how hedgies won"t be knocking down their doors to gain access.  Per Bloomberg:

The firm is proposing three levels of service -- bronze, silver and gold -- with the premium package comprising unlimited reports, field trips and “occasional” one-on-one meetings with analysts and corporate executives, according to a pricing document seen by Bloomberg News. At the bottom end of the scale, read-only access to European research will start at 30,000 pounds.

At Barclays, even if clients stump up 350,000 pounds for the gold “trans-Atlantic” package, they could still end up spending more. “Bespoke” analyst work and corporate access is priced separately, according to the document. Field trips, industry events and company management meetings are also at the bank’s discretion, and analyst one-on-ones are “capped,” it shows.

Prices in the document may not apply to all clients, have been in flux and could still be subject to change, a person familiar with the process said, asking not to be identified discussing the matter. A Barclays spokesman declined to comment.

Banks are scrambling as they enter the last six months before the decades-old practice of sending out free analyst reports as a courtesy and marketing strategy comes to an end. The European Union’s MiFID II regulations, enforced from Jan. 3, require money managers to separate the trading commissions they pay from investment-research fees. This means banks in turn have to be more transparent, providing specific charges for their analysts’ time and work in order to comply.

Of course, the logical takeaway from these exorbitant offering prices, if they hold, is that institutional clients will ultimately be forced to consolidate their vendors...translation, so long to the small independent research shops.  Meanwhile, investment banks will be forced to control costs by trying to focus on writing reports that people actually read (vs. the 1% hit rate they have today).  All of which means that those shrinking analysts pools are about to completely collapse.

In fact, as McKinsey recently noted, up to 30% of research analysts could be at risk of losing their cushy banking jobs as result of Europe"s new regulations.

Europe’s impending ban on free research will cost hundreds of analysts their jobs with banks set to cut about $1.2 billion of investment on the area, according to a report by McKinsey & Co.

The consultancy estimates the $4 billion that the top-10 sell-side banks currently spend on research annually is likely to fall by 30 percent as clients become pickier about what they pay for, McKinsey Partner Roger Rudisuli said in an interview. Investment banks’ cash equity research headcount has fallen 12 percent to 3,900 since 2011 compared with as much as 40 percent in sales and trading, leaving the area facing “big cuts” to catch up, he said.

“Two to three global banking players will preserve their status in the new era, winning the execution arms race and dominating trading in equities around the globe,” McKinsey said in a report Wednesday, which Rudisuli helped write. “Over the coming five years, banks will need to make hard choices and play to their strengths. Not only will the top ranks be thinned out, there will be shakeouts in regional markets.”

Of course, as we"ve said before, almost any amount of money seems, at least to us, to be too much to have the same people give you the same advice over and over again, namely "buy more stocks, faster."

McKinsey: Banks Will Have To Slash 30% Of Analyst Jobs To Comply With New Research Rules

As the global equity research market continues to wrestle with how they will comply with the European Union"s MiFID II regulations, McKinsey & Co. has just penned a new study effectively saying they"ll have no choice but to fire a ton of equity research analysts who write a bunch of stuff that no one ever reads...which seems like a reasonable guess.  Per Bloomberg:

Europe’s impending ban on free research will cost hundreds of analysts their jobs with banks set to cut about $1.2 billion of investment on the area, according to a report by McKinsey & Co.

The consultancy estimates the $4 billion that the top-10 sell-side banks currently spend on research annually is likely to fall by 30 percent as clients become pickier about what they pay for, McKinsey Partner Roger Rudisuli said in an interview. Investment banks’ cash equity research headcount has fallen 12 percent to 3,900 since 2011 compared with as much as 40 percent in sales and trading, leaving the area facing “big cuts” to catch up, he said.

“Two to three global banking players will preserve their status in the new era, winning the execution arms race and dominating trading in equities around the globe,” McKinsey said in a report Wednesday, which Rudisuli helped write. “Over the coming five years, banks will need to make hard choices and play to their strengths. Not only will the top ranks be thinned out, there will be shakeouts in regional markets.”

For those who have managed to avoid this particular distraction, the global equity research industry is in the midst of a major disruption which has been brought on by the European Union’s MiFID II regulations, enforced from Jan. 3, which aim to tackle conflicts of interest by requiring asset managers to separate the trading commissions they pay from investment-research fees.

Of course, the biggest problem with such a regulation continues to be that literally no one knows the true "value" of equity research, not even the investment banks that are selling it.

Firms are also debating how to price analyst reports, with some firms modeling packages on cable TV subscriptions, running from basic to “all-in” offers, according to the report. Deutsche Bank AG has pitched clients a metered, “pay as you go” approach whereas JPMorgan Chase & Co. has quoted customers a $50,000 flat fee for basis access to fixed-income analysis, people familiar with the matter have said.

“Banks are scrambling to get these pricing infrastructures in place, as well as how they do tracking and invoicing,” Rudisuli said. “They are all rushing to the finish line to be ready in January.”

And perhaps that has something to do with the fact that, as we"ve said before, institutional clients couldn"t care less about the 300 research reports they receive daily (all of which can be boiled down to one simple thesis: Buy The Fucking Dip), but rather only about gaining access to corporate management teams so they can get "color" on upcoming earnings reports.

Another change Rudisuli foresees for the industry is the start of bidding wars for the most valuable commodity banks can offer investors: time with corporate leaders and their star analysts.

“Banks will experiment at first, but over time we could see things like auctions could take a more prominent role; at the end of the day there are only five seats in these meetings,” he said. “The challenge there will be that the people willing to pay the most will be hedge funds, but the preference for corporates will be to meet with only long-only investors.”

Of course, as we"ve said before, almost any amount of money seems, at least to us, to be too much to have the same people give you the same advice over and over again, namely "buy more stocks, faster."  There, we just summarized 90% of all equity research that will ever be written for the rest of history in 4 simple words and completely free of charge.  You"re welcome.

Another shoe drops in the FX fraud manipulation conspiracy

FX is quite literally, a rigged game.  Not like the stock market, well not exactly.  FX has been, a game of "how many numbers am I holding behind my back?" and the guess is always wrong!  As we explain in Splitting Pennies Understanding Forex - FX is rigged.  But that doesn"t mean there isn"t opportunity!  One just needs to understand it.

From Law 360:

French bank BNP Paribas was fined $350 million by the New York State Department of
Financial Services for lax oversight in its foreign-exchange business that
allowed “nearly unfettered misconduct” by more than a dozen employees involved
in exchange rate manipulation, officials announced Wednesday.

From 2007 through 2013, a trader on the bank’s New York desk, identified in the
consent order as Jason Katz, ran a number of schemes with more than a dozen
BNPP traders and salespeople on key foreign exchange trading desks to
manipulate prices and spreads in several currencies, including the South
African rand, Hungarian forint and Turkish lira, officials said.

He called his group of traders a "cartel" and they communicated in a
chat room called "ZAR Domination," a reference to the rand’s trading
symbol, according to the consent order. The group would push up the price of
the illiquid rand during New York business hours when the South African market
was closed, moving the currency in whichever way they chose, and thus
depressing competition, officials said.

Katz also enlisted colleagues at other banks to widen spreads for orders in
rands, increasing bank profits and limiting competition at the customer’
expense, the order says. Some of the traders engaged in illegal coordination
and shared confidential customer information, officials said. As part of a
cooperation agreement with prosecutors, Katz pled guilty in Manhattan federal court in
January to one count of conspiracy to restrain trade in violation of the
Sherman Act.

“Participants in the foreign exchange market rely on a transparent and fair
market to ensure competitive prices for their trades for all participants,”
Financial Services Superintendent Maria T. Vullo said in a statement. “Here the
bank paid little or no attention to the supervision of its foreign exchange
trading business, allowing BNPP traders and others to violate New York state
law over the course of many years and repeatedly abused the trust of their
customers."

BNP Paribas, which employs nearly 190,000 people and has total assets of more
than €2.1 trillion (approximately $2.36 trillion), said in a statement that the
$350 million fine will be covered by existing provisions. It said it had
implemented a group-wide remediation initiative and cooperated fully in the
investigation.

“The conduct which led to this settlement occurred during the period from 2007
to 2013. Since this time, BNP Paribas has proactively implemented extensive
measures to strengthen its systems of control and compliance,” the bank said in
its statement. “The group has increased resources and staff dedicated to these
functions, conducted extensive staff training and launched a new code of
conduct which applies to all staff.”

Three BNPP employees were fired, seven more resigned and several others were
disciplined for misconduct or supervisory shortcomings in relation to the
probe, the order says.

Katz’s attorney, Michael Tremonte of Sher Tremonte LLP, did not respond Wednesday to a call seeking
comment.

But really, what"s another $350 Million in the grand scheme of things for BNP?  Just another day"s profits in the FX market.

This probe isn"t new; regulators have been looking into FX rigging for years.  And practically, the fine won"t make any customers whole - it will just shore up the coffers for the NY State department of financial services.  With inflation out of control, they need the money.  

For a detailed breakdown of this virtual monopoly "they" have on the global financial system, checkout Splitting Pennies Understanding Forex.

Meet Brad Birkenfeld: "Lucifer's Banker"

Authored by Adam Taggart via PeakProsperity.com,

Just how bad is the ongoing fraud in the banking system? Get ready for a mind-bowing expose by a former insider at UBS.

Brad Birkenfield, author of Lucifer"s Banker: The Untold Story of How I Destroyed Swiss Bank Secrecy, recounts the efforts he uncovered by his employer to help its clients cheat the US government out of tens of $billions in taxes.

But despite his working with the government closely to expose the gigantic conspiracy between US-based tax cheats and the giant Swiss bank, UBS, the so-called Justice Department went after Mr. Birkenfeld for abetting tax evasion by one of his clients. After spending thirty months in Federal prison, he was released and three weeks later, received a whistle-blower check for $104 million, the largest such check ever from the IRS Whistle-blower Office.

Once again, 300,000,000 Americans-plus got screwed by the corrupt Department of Justice. They’re not about justice, they’re about protecting themselves, trying to take credit, and making everyone else listen to what they say the story is.

We remember the financial crisis of 2008. It was devastating and so many people lost their jobs, lost their homes and so forth. In the entire financial crisis, there was not one banker to go to jail. The only banker to go to jail was the UBS whistleblower who exposed the largest and longest running tax fraud in the world.

Here’s the problem with the system. When you fine UBS you must realize UBS is a Swiss bank, so that means they write off the fine on their taxes. So then, that means the Swiss taxpayers carry the burden. That’s the first thing.

The second thing is go look at the millions and millions of dollars in legal fees spent to defend their conduct. The UBS shareholders pick up that tab.

So you have UBS shareholders and Swiss citizens picking up the tab for bankers who just keep doing their business, and walk away untouched. How is this possible?

And third, the US government has set an incredibly bad precedent and zero deterrence. Because what they’re saying is, “Oh, if you get caught again, you just write a check. Yes, you might have to add $5 million or $10 million to that check, but just keep doing the business you’re doing.”

And the pathetic prosecutors at the Department of Justice say, “Oh, see? We’ve got a check and we can put it on our resume saying, ‘We got $200 million from this bank for doing illegal conduct.’”

Yeah, but you screwed the American people. It’s outrageous.

Click the play button below to listen to Chris" interview with Brad Birkenfeld (45m:31s).

Equity Research Faces "Major Disruption" As Study Finds "Less Than 1%" Of Reports Are Actually Read

What if we were to tell you that for the bargain basement price of just $10,000 per hour you could buy yourself the privilege of a 1-hour conversation with an equity research analyst from a top-notch investment bank, would that be something that might be of interest to you?  While we hate to be overly pessimistic, we"re gonna go out a limb and guess that most of you answered in the negative to that question.

As we pointed out a few weeks ago, the traditional I-banking equity research model is about to undergo a radical transformation courtesy of the new Mifid II regulations set to go into effect in 2018 in Europe.  Among other things, the new rules require i-banks to break out the pricing of equity research charged to buyside clients, which up until now had been provided "free of charge" but effectively covered by trading commissions.

The problem, as anyone who has ever been flooded with a daily barrage of 1,000s of reports can attest, is that while the supply of equity research is seemingly endless, the demand may not be quite as pervasive as the bulge bracket banks once thought. 

As Reuters points out today, just the top 15 global investment banks produce over 40,000 research reports every single week.  Unfortunately, only about 1% of those reports are actually read by investors on any given day and we suspect even that estimate is generous.

For example, about 40,000 research reports are produced every week by the world"s top 15 global investment banks, of which less than 1 percent are actually read by investors, according to Quinlan.

More than 30 analysts cover HSBC (HSBA.L) (0005.HK) on a regular basis, though only 11 of them have a rating of three stars or above even though it is a key factor of consideration by many global fund managers.

Meanwhile, the fairly massive supply/demand gap for research seems to be driving a wide bid/ask spread between what investment banks require to cover the costs of their expensive analysts and what their buyside clients are willing to pay for the end result.  In fact, a recent survey of fund managers by consultancy Quinlan & Associates found that analyst headcounts at banks would have to fall by 30% by 2020 in order to eliminate all of the costs that funds simply wouldn"t be willing to absorb (a.k.a. the "crap" as one fund manager put it).  Per the  Financial Times:

“The figures are all over the place at the moment. Some [quotes] are fair and reasonable, and [with others] we thought: there is no way we are paying that — they will have to recalibrate their business models or part ways with us altogether.”

“This is the biggest problem,” he said. “It will cause a lot of problems in 2018 because no one has worked out how much the research is worth.

“There will be a lot of c**p that clients won’t pay for and that is when the big cuts [to the analyst workforce] at the global banks will come. The feedback from many [in asset management] is that the price of research is too high and not granular enough.”

Meanwhile, with the large global banks looking to charge clients $300,000 - $500,000 per year to cover their bloated equity research budgets, the more nimble, independent research providers could be on the verge of some major share gains.

A period of severe turmoil is facing the securities research industry as a regulatory overhaul threatens the way investment research is done.

Online portals, in particular, are set to gain market share at the expense of major "bulge bracket" investment banks, reaching a forecasted market share of $1.4 billion or 15 percent of the global investment research industry spend by 2020 - from less than 1 percent last year.

"The global investment research market is on the cusp of major disruption," said Benjamin Quinlan, CEO of Hong Kong-based Quinlan & Associates and author of a report on the challenges facing the research sector.

Frankly, we"re not sure how the hedge fund industry will survive without an army of 23-year-old equity research analysts writing hourly updates instructing managers to BTFD.

New European Regulations Set To Crush Equity Research Budgets By $300 Million

Literally no one knows the true "value" of equity research, not even the investment banks that are selling it.  Up until now, equity research has been treated as a "freebie" given away to institutional clients in return for trading commissions but that is all about to change thanks to the European Union’s MiFID II regulations, which require asset managers to separate trading commissions from investment-research payments.

Unfortunately, at least for the Investment Banks of the world, while the cost of generating equity research may be substantial, it turns out that the true "value", as defined by institutional clients" maximum willingness to pay for reports, may be much less.  Which is shocking given the creativity required to constantly generate new variations of daily reports politely suggesting that you "Buy The Fucking Dip."

As Bloomberg notes today, the regulatory change slated to take effect next January could cost the I-banks $300 million in fees.

Asset-managers in Europe and the U.S. will probably cut more than $300 million from research budgets in anticipation of regulations aimed at rooting out conflicts of interest in the market for investment information.

That’s according to a survey of 99 fund managers and traders conducted by consulting firm Greenwich Associates, which assessed the shake-up coming to the multi billion-dollar market for investment research over the next year.

The European Union’s MiFID II regulations, which require asset managers to separate trading commissions from investment-research payments, will have a “clearly negative” impact on the amount of commission money that is spent on research and advisory services, according to the Stamford, Connecticut-based firm’s findings released Tuesday. While the budget cuts will be “relatively modest” at individual asset-managers, research providers across the board fear the new law will prompt “a substantial decrease” in buy-side spending.

The findings equate to a 7% drop in overall commission spend for European institutions and a 5% drop in the U.S.. Those reductions would contribute to a nearly $200 million decrease in U.S. research commission spend and a decrease of more than 100 million euros in Europe.

While the rules are technically only applicable within the confines of the European Union, U.S. asset managers with substantial business in the U.K. and Europe are also preparing for the changes and are choosing to adopt global standards.  Meanwhile, more than half of U.S. survey participants and almost three quarters in Europe expect the rules to result in a slimming of their counterparty list for research and advisory services. Moreover, 40% of U.S. respondents and more than 50% of European ones expect to limit the number of brokers they trade with.

In response to the changing regulatory environment, Macquarie recently launched a new a la carte product, called "Macquarie Dimension" that allows institutional clients to purchase research reports, managements meetings, analyst calls, etc. on a pay-as-you-go basis.  Per Bloomberg:

Macquarie Group Ltd. is trying a new way to charge clients for research: unbundling it.

The Australian bank introduced a service this year that helps solve two problems facing asset managers: they have to trade a lot before getting access to research from big brokers; and regulations taking effect next year will prohibit that kind of arrangement. The new a la carte system, called “Macquarie Dimension,” provides access to research reports, corporate meetings and phone calls with analysts on a pay-as-you-go basis alongside its usual equity-research offerings.

The move is part of a broader trend where specialized financial companies are struggling to find ways to pay for work their clients used to fund with trading piggybacks. The new approach meets Macquarie’s goal of servicing more accounts and monetizing its content, Peter Bentley, managing director at Macquarie Dimension, said in an interview last week at Bloomberg’s New York headquarters.

Bentley sees opportunity in what he calls “regulatory tailwinds” and a chance to service under-appreciated clients. Macquarie isn’t “trying to be particularly disruptive about how people consume research, but we are trying to be innovative in how to commercialize it,” he said.

Of course, as we said before, almost any amount of money seems, at least to us, to be too much to have the same people give you the same advice over and over again, namely "buy more stocks, faster."  There, we just summarized 90% of all equity research that will ever be written for the rest of history in 4 simple words and completely free of charge.  You"re welcome.

Banks "Gag" Analysts From Discussing Politics On Air

In what may be a welcome change to what is already an overly politically charged financial atmosphere, Reuters reports that major banks are cracking down on market analysts talking publicly about politics over concerns of appearing partial with HSBC going so far to take its main global currencies commentator off air in an intensification of the financial "gag order." HSBC, which has seen its share of political cross-currents in recent years, especially when it comes to money laundering and funding quasi-legal regimes, said that currency strategists at HSBC"s global research division would not be making "unsupervised" public appearances due to concerns about commenting on political events which have been seen to drive prices.

HSBC is not alone: a Reuters source said that Credit Agricole strategists had been similarly instructed not to talk about the details of the French presidential campaign, which has moved the price of the euro currency. Other major banks including Citigroup, Barclays and Bank of America already have tight controls in place aimed at keeping comments by strategists politically neutral, "but a blanket ban on public appearances is unusual."

As part of the crackdown, HSBC"s David Bloom, and other currency analysts from the bank, would not be appearing on television for some time. As HSBC"s chief currency strategist, Bloom was among the most outspoken commentators on the impact on sterling of the British vote to leave the European Union. He correctly forecast a dramatic fall and then dubbed the pound the government"s "de facto official opposition" as it sank after the vote last June. That said, Bloom and other currency strategists would continue to meet clients and write regular research.

"We are still engaging with the media. Our economists are engaging, our equity strategists are engaging," one source at HSBC said, asking not to be named.

"But politics is something the bank does not want to talk about and currencies are probably the front line of where we could actually be drawn into something that we would want to avoid. This is a temporary thing."

HSBC has enforced a global crackdown on bankers" interactions with the media over the past two years, other sources at the bank told Reuters, including reducing the number of staff approved to talk to the press and requiring bankers to notify public relations whenever they meet with a reporter.

While perhaps welcome, the enforced gag is also troubling and reeks of censorship imposed by forces from outside the bank"s corner office: the HSBC move follows a number of European banks tightening up on how freely currency market analysts are allowed to speak to the media and in public situations in the past three years. Part of that has been driven by a tightening of regulation after several of the world"s biggest banks were fined billions for manipulating the $5 trillion a day global currencies market. Banks are also preparing for changes imposed by Europe"s MiFID II banking regulations at the end of this year.

But several banks also told strategists not to comment publicly on the Scottish independence referendum in 2014, and there were widespread limits on how freely analysts could discuss last year"s Brexit vote for fear of breaking electoral rules and alienating customers.

Of course, with a wave of political events on the horizon, including French, German, Dutch, and possibly Italian elections in the coming months, and seen as carrying similar risks for the euro this year to the waves of selling that have hit the pound in the past 12 months, very soon not a single European currency strategist may be left speaking.

The anti-media blowback may be only just starting: as Reuters adds, strategists from several banks said that following the surprise election of U.S. President Donald Trump and last year"s Brexit shock it was now standard practice to be told to steer clear of discussing the details of what was positive or negative for markets in the political sphere, for fear of being seen to make unqualified judgements on policy or politics.

"It is very common now for there to be limits," said a strategist with one European bank. "What the market thinks about (French presidential candidate) Marine Le Pen is not purely about economics, it"s about the broader political risks, which then might play out in demand, growth and so on. Am I qualified to talk about that?" the strategist added.  The answer is unclear, especially after Bloomberg reported last week that top advisers to French presidential candidate Marine Le Pen have met with strategists and analysts from BlackRock Inc, Barclays Plc and UBS Group AG, among other firms to explain their economic program and plans to withdraw France from the euro. As such, previously porous Chinese wall between financial commentary and inside knowledge into politics may soon become insurmountable.

"Is it really clear what is moving the market? It is obviously shaky ground" the (soon to be gagged) Reuters source added.

DOJ Probing People Who Worked In Deutsche's Mortgage Unit To "Hold Individuals Accountable"

Deutsche Bank employees who were engaged in the actual trades that ended up costing the bank a $7.2 billion settlement at the end of 2016, and who were hoping to quietly get away without criminal or civil charges, are set for disappointment because as IFR reports the DOJ is probing for potential fraud by individuals who worked in Deutsche Bank"s mortgage unit in the run-up to the financial crisis. 

The investigation of former Deutsche staffers is a push to hold individuals accountable for their role in the housing crisis, IFR"s sources said. The probe follows Deutsche"s multi-billion settlement in December with the DOJ over the sale of toxic residential mortgage securities between 2006 and 2007. Observers were surprised when no individuals who worked at Deutsche were named in the settlement, leaving shareholders to foot the bill.

Now, the DOJ"s fresh probe leaves open the possibility of pursuing individuals who had worked at Deutsche. Confirming that there has been no individuals have been exempt from personal liability, in the January 17 press release outlining the facts, finalization and terms of the settlement, the DOJ said that the settlement with Deutsche does not release any individuals from potential criminal or civil liability.

Speaking of which, has anyone seen Greg Lippman these days?

* * *

Separately, and presaging what will soon take place in Deutsche Bank, Reuters writes that the DOJ in December named two former Barclays RMBS staffers in a civil suit it filed against Barclays and some of its US affiliates. The complaint against Barclays alleged that the bank and its staffers fraudulently sold tens of billions of dollars of RMBS, and repeatedly misled investors about the quality of the mortgages backing those deals. The individuals named in the Barclays complaint, Paul Menefee and John Carroll, have obtained their own legal counsel, a Barclays spokesperson said. Menefee was Barclays" head banker on its subprime RMBS securitizations, and Carroll was Barclays" head trader for subprime loan acquisitions.

"It is surprising and extremely disappointing that the government decided to file this highly unusual lawsuit. John Carroll intends to challenge these ill-conceived and baseless allegations, and expects to be fully vindicated," Crowell & Moring partner Glen McGorty, who is representing Carroll, said in an emailed statement to IFR. A response to the complaint against Carroll has not yet been filed, McGorty said.

Lawyers for Menefee did not immediately respond to requests for comment. No filing has been made on behalf of Menefee, according to a search of the federal court docket. Barclays previously said it rejects the claims made in the complaint.

"Barclays considers that the claims made in the complaint are disconnected from the facts. We have an obligation to our shareholders, customers, clients, and employees to defend ourselves against unreasonable allegations and demands. Barclays will vigorously defend the complaint and seek its dismissal at the earliest opportunity," the bank said in a statement.

Moelis Wins Saudi Aramco Advisory Mandate: World's Biggest IPO

In what will be the biggest victory in the brief history of Ken Moelis" relatively new New York-based independent investment bank, Moelis & Co., moments ago the FT has reported that Moelis has won the advisory mandate for the planned IPO of Saudi Aramco. 

As the FT notes, "winning the hotly contested mandate represents a coup for the boutique investment bank, which was founded by Ken Moelis in the midst of the financial crisis in 2007." As for the potential for advisory fees, they are - in a word - huge: the Saudis hope to turn the state-owned oil group into the world’s biggest, most valuable publicly traded company, with a valuation of about $2tn. As the FT also adds, citing people close to the IPO planning process, the sale of a 5% stake should happen next year, although the number of shares sold could increase, although depending on the price of oil, the timing could slip.

A quick recap on the strategy behind the Saudi plan to take the company public:

Saudi Aramco’s IPO is part of a transformation plan, envisaged by Saudi Arabia’s power broker deputy crown prince, Mohammed bin Salman, which seeks broad-based privatisation to boost employment and diversify the kingdom away from oil. Prince Mohammed believes the privatisation could value Saudi Aramco at $2tn.

A successful flotation aims to use the IPO proceeds for investments in non-oil industries in order to wean the country off its most precious resource.

Banks, advisory firms and consultancies have scrambled to secure work on the IPO since Saudi officials announced their intention a year ago. JPMorgan, which has been Saudi Aramco’s commercial banker for years, and Michael Klein, a former star Citigroup banker, are working with the Saudi authorities on a broad range of matters including the IPO.

It was not immediately clear was the fee structure granted to Moelis will be, but even a sizable haircut on traditional advisory fee assignments will be a huge windfall for the investment bank.

The 5-Step “Evolution” Of A Family Office

By Chris at www.CapitalistExploits.at

Warning: This story is entirely fictional except for all the parts which are not. It is the story of a 5-step process of the "evolution" of a family office.

I felt compelled to pen this missive since it’s representative of so many family offices out there and maybe in doing so one or two save themselves some potentially painful headaches.

Step 1: The Patriarch Builds His Wealth

This is the story of Hans Krapenschitter and his progeny. It was in the late 80’s that Hans, then in his 30"s, made his fortune. Germany was gripped by recession, factories had closed, people had lost their jobs, real estate prices had plummeted, and so too had hemlines. Horrid stuff.

Gurus emerged, telling everyone that the world would never again see greed, avarice, easy credit, or mini skirts.

 

Instead, the future lay in gathering kale and cabbages from local community gardens, and being subjected to films where “maidens" in long flowing dresses and bonnets roamed meadows, gathering daisies, while falling in love with schoolteachers. There"d be no films where people got punched and shot and even at the raunchiest of clubs, girls skirts would be well below the knee-line.

To Hans, this all sounded like a worst nightmare come true, and knowing a little bit about human nature Hans saw his opportunity. Bucking the trend, he started a company producing T-shirts with skulls on and slogans such as “Ich werde deinen Arsch treten” (I’ll kick your ass).

In addition, he began making the most outrageous revealing woman clothing he could think of. If the world was to devolve into a global version of the Sound of Music, it wasn"t going to do so without a fight from Hans.

Fortunately for Hans the recession ended and greed, avarice, and easy credit return with a vengeance. The easy credit helped fuel Hans" business growth, and he captured the vast market share for a new zeitgeist, as footballers" wives became celebrities and women clothing prices became inversely correlated with the amount of material used. The good times were back. 

Ummmm, ok.

Step 2: The Bankers Take Notice

After depositing some sizeable checks with his local bank Hans receives a letter from the bank.

"Dear Mr Krapenschitter,

Let me introduce myself. My name is Mr. Frederick Arsenlichker, and I am delighted to have been appointed as your private banker. We at Ditschke Bank pride ourselves in providing outstanding personal service to our most valuable clients, and I will be at your service to provide you with our most exclusive range of services which are now available to you.

Please let me know a suitable time for us to meet in person to discuss your business and needs.

Sincerely,

Frederick Arsenlichker (Private Wealth Management, Ditschke Bank)"

Hans is flattered. He feels valued, not really understanding what just happened (what it really means is that he’s now in line to get spammed all the products the bank has on offer - whether he wants them or not and whether they"re any good or not).

Now to Frederick...

To understand Frederick, he’s a guy who spends over an hour in the bathroom every morning, double checks his fringe when passing anything with a reflective surface, and now in his mid-30"s has learned all the ins and outs of sales. To be sure, he’s great fun to have a drink with and knows enough about his products to sound awfully smart to the layman. He"s damn good at selling the bank"s products, but he"s never had to manage risk - and this is where the real problems surface (as you’ll see).

This isn"t his fault. He’s spent his life on the sell side. Fortunately Frederick is smart and he knows what he doesn’t know. Many like him are like 10-year olds after watching Rockie and, despite not having the muscles and never having learnt how to fight, think they’ve got what it takes to take down 10 men. Just because they’ve watched buy side guys, they think they know what it takes. Most don’t.

Step 3: Hans Needs Help

Hans" business spreads like an Australian bushfire as he breaks into the UK market where "lad culture" is pioneering an entirely new obnoxious breed of buyers, and where there are no ladies, only girls. His clothing brand is THE brand. After securing a distribution agreement with the country"s second largest retailer his wealth accelerates.

Aside from the ridiculous house his wife encouraged him to buy on the French Riviera, he now has more and more money which he realises he should probably do something with.

He"s made a few investments based on "suggestions" made to him by multiple private bankers.

You see, Frederick isn"t the only contact Hans has in banking. Due to his business needs Hans has opened no less than 8 banking relationships and they"ve all taken notice, appointing private bankers to "assist" Hans.

These private bankers regularly invite Hans to private gatherings and to his delight he"s found that tickets to the Grand Prix in Monaco, the finals of the European football championships, and the like are easy to come by. Not that he couldn"t pay for them if he wanted to, but it"s nice to get free stuff. The problem is that Hans is feeling a little overwhelmed. All this wealth comes with the responsibility to manage it.

He’s known Frederick for several years now and likes him. Many of these other private bankers are a bit too aggressive. There was that one Spanish banker, Eduardo, who tried to get him a prostitute the last time they were at a special cocktail function put on by the bank. He didn"t think his wife would appreciate that.

Frederick, on the other hand, has about 100 clients like Hans who he “manages”. He’s getting sick of a base salary with commissions bonus, having to clock in and out of his cubicle like a well trained gopher, and the intellectually vaporise environment of a big bank is suffocating.

On the sly, he’s been looking to leverage his network of investors and putting out feelers.

Step 4: Hans Hires Help

Hans: "Frederick, I"m swamped here. I"ve known you for a long time now and I trust you. Do you by any chance know of someone in your field who you"d recommend to help manage my money full time?"

Frederick: "Funny you ask. I"ve been thinking of doing just that myself for a number of clients and would be very interested in doing this for you."

Over some schnapps and sausages, Frederick becomes CIO of the Krapenschitter Family Office, and at long last he can take off the bloody suit and tie and dress in jeans and T-shirts because Hans, after all, has made a living out of clothing that bankers would never wear.

Step 5: The Muddle

And now Frederick must learn really quickly the difference between selling product and investing in product. He quickly reaches out to all his private banker buddies and sources a number of products which Hans can allocate capital into. Since the banks are large fee generating businesses they have two mandates:

1. Generate as much fees as possible and


2. Try keep your clients

Managing the two is tricky business. It requires gently raping the client, but not too roughly that they feel the pain.

One lesson that Frederick has learnt from his years at the bank is that clients hate losing money. As such, fixed income is an easy sell. The fees are still pretty reasonable, and importantly you typically get to keep your customers as you can"t lose money on fixed income, right? Ah well, sort of.

What the Sales Guys Don"t Fully Understand

Frederick"s buddies are all selling either fixed income products or the latest best thing: Low volatility funds. It"s the place to be.

You see, they"ve done nothing but go up for their entire careers (which is to say a decade, two at most). Experience has taught them that this is what works. Their only sense of history is that the iPhone never used to take pictures, like waaay back, and how mad was that?

Frederick"s buddies know only that the firms they work for are pushing them to sell these products.

What they don"t know is that the low volatility funds they"re selling are being repackaged into synthetic bond like products and sold to institutional dumb money.

The way it works is that the proprietary desks write options against these funds and thereby deliver a steady stream of income. This gets packaged and sold as "yield bearing" instruments to pension funds and other dumb money. "They"re very low risk," the salesmen say because these are solid equities with extremely low volatility. They"re almost like bonds. No, really.

Some of the proprietary traders (the older ones) know the risks and many don"t really get it. But so long as Frederick and the long list of clients in the banks" affiliate network keep buying the products, these babies are guaranteed cash cows.

Frederick, after having been in the business for enough years, realises that equities should make up a decent portion of Hans" assets. Because he doesn"t follow the markets (I mean, he watches Bloomberg and CNBC but couldn"t tell you what drives liquidity, cross border capital flows, money velocity, or why anyone should track the gold price) he"s got no sense of market cycles, and simply becomes an asset allocator reliant on his buddies (who are all sell side, remember?) for advice.

And so Hans" portfolio, on paper, looks pretty reasonable, while sporting the kind of risk that Evel Knievel would have shied away from.

Hans is presented with some investment opportunities and, knowing nothing about them, passes them to Frederick to review. Frederick takes a look.

A gold fund? Why on earth would anyone invest in a gold fund, he asks himself?

He googles the gold price and finds that it"s been in a bear market for 20 years. What lunatic would invest in this? Crazy!

He emails his buddies asking them if they"ve got a gold fund in their product lineup and what they think of it. One had a gold fund but it was closed down after lack of performance and lack of interest. Clearly this is a waste of time.

And so Hans, the family patriarch and generator of immense wealth, who never understood the difference between sell side and buy side hired Frederick the now CIO of the Krapenschitter Family Office, in charge of over $450 million.

Unwittingly - and neither realise - it both are drawn into a long daisy chain beginning with product sales which nobody in charge of managing the money actually understands. A chain designed to allow the major banks to make money on both the product fees as well as quietly trading proprietary positions against the products sold which generate amazing returns.

Frederick, for his part, wants to ensure he keeps his job and so he essentially benchmarks and follows his sell side buddies, who, in turn, push products the banks need sold.

While all this is taking place, the market builds the momentum for the inevitable – because every market has a cycle and this one is about to turn.

But Hans is on the Riviera enjoying the sunshine and Frederick is looking forward to a holiday with his new girlfriend. He’s going to take her to Ibiza wearing some of Hans latest product line. It’s truly ridiculous and he can’t wait.

- Chris

"A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain." — Mark Twain

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Jewish Trust Sues Deutsche Bank For $3 Billion

Just when it seemed that no more lawsuits are possible for Germany"s largest lender, which over the past two years has settled or otherwise paid billions to set aside a barrage of allegations of wrongdoing leading to the bank"s suspension of bonuses for most senior bankers, today we learn that Deutsche Bank was sued by a Jewish charitable trust in Florida, alleging that the bank wrongly withheld as much as $3 billion from the heirs to a wealthy German family.

According to Bloomberg, the lawsuit claims the bank refuses to return the funds initially deposited by the Wertheim family in accounts opened at what is now Credit Suisse Group AG before the rise of the Nazis in Germany. Those accounts were later transferred to Deutsche Bank, according to the complaint filed Wednesday in federal court by Wertheim Jewish Education Trust LLC.

Deutsche Bank has “refused to cooperate with the heirs of the Wertheim family fortune in the recovery and return of the monies that they are withholding from the rightful heirs,” and preventing the use of the funds for charitable and other purposes, according to the complaint filed in Fort Lauderdale. 

While on the surface, the case looks mindane, the details are interesting.

The charitable trust is an heir to the descendants of Joseph Wertheim, a family that amassed a fortune by building the KaDeWe department store in Berlin and a textile and manufacturing empire in Frankfurt, according to the complaint. One of those descendants, Karl Wertheim, feared the German rise of anti-Semitism in the 1920s, moved his businesses to Spain and opened an account at Credit Suisse in 1931.

The Swiss bank protected the family assets through the rise of the Nazis in the 1930s and during World War II, using secret numbered accounts, pseudonyms and trust accounts, according to the complaint.

When Karl Wertheim died in 1945, the estate passed to his wife, Maria, who managed the fortune until the early 1970s, according to the lawsuit. The fortune included the sewing machine and office-machine business of Hispano Olivetti SA, accounts and investment portfolios in Swiss banks, land in Europe and the U.S. and art collections, it said.  As the health of Maria Wertheim deteriorated, she turned to Ambrosius Wolfgang Bauml to help manage the assets. After she died in 1976, Bauml managed the Wertheim family fortune until his death in 1990, when control passed to the family of Rudolf Sutor.

This is where Deutsche bank comes in: "through a complex series of events, the assets were transferred in 1993 to Deutsche Bank, which misled the Wertheim heirs for many years about the accounts, according to the complaint." The lawsuit thus seeks return of $3 billion and an accounting of the assets in dispute.

Understandably, being quietly accused of antisemitism did not strike Deutsche Bank as proper and it responded that is “taking the matter very seriously,” according spokesman Tim-Oliver Ambrosius. “The accusations are completely unfounded, and Deutsche Bank denies them,” he said. “All proceedings initiated against Deutsche Bank in this matter have been decided in favor of Deutsche Bank.”

To be sure, Deutsche Bank has had "sensitive" exposure in the past. Back in 1998, Deutsche Bank acknowledged that it had dealt in Nazi gold during World War II and said it ""regrets most deeply injustices that occurred.""  The publication of a historian"s report commissioned by the bank, and the bank"s response to it expanded a class-action suit brought by lawyers in New York on behalf of Holocaust survivors against Deutsche Bank which had long been regarded by other historians as having played key roles in the financing of the Nazi war effort.

""Of course these transactions took place,"" said Ronald Weichert, a Deutsche Bank spokesman, referring to the report"s conclusion that the bank had bought more than 4.4 tons of gold from the Reichsbank, the onetime central bank. ""This gold business was normal business during the war."" At wartime values and exchange rates, the gold was worth some $5 million, about one ninth of its estimated worth today.

The bank commissioned historians from Israel, the United States, Britain and Germany to produce an independent report on its wartime gold dealings -- part of a wave of inquiries inspired by developments in Switzerland. The Swiss central bank was the biggest single purchaser of looted gold acquired by Nazi Germany from countries it occupied and from individual Jews robbed as they faced death in extermination camps.

The report said Deutsche Bank channeled gold transactions with the Reichsbank through branches in occupied Austria and Turkey, then a self-avowed neutral power. Of purchases totaling 4,446 kilograms of gold, the report concluded, 744 kilograms were dental gold taken from Jews" teeth, wedding bands and personal jewelry amassed in Berlin by an SS officer named Bruno Melmer.

It is unclear whether DB"s Nazi war effort" roots will be unearthed as part of this lawsuit. However, with Deutsche Bank rolling over on virtually every other lawsuit it has been handed in recent years, it would not be surprising if the plaintiff"s case emerged as strong. Ultimately, should a court find in favor of the Trust, Deutsche Bank may just need to get that refinancing that it avoided when the DOJ slashed its "ask" on the US RMBS settlement by more than half.