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Tuesday, 24 October 2017

Grumpy bankers least of Cryan’s woes

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  • keith mullin

Not that anyone should be surprised, but didn’t John Cryan have a demeanour of a weary man with a lot of troubles on his shoulders in his interview on CNBC?

Also, I’m intrigued as to whether the Deutsche Bank boss and his media relations folks were aware that the video interview he gave to CNBC from Davos would be preceded by a wonderful piece of stealth marketing – by Credit Suisse, which had a 15-second ad running at the beginning of the piece. It had the wonderful look of ‘Deutsche Bank powered by Credit Suisse’ about it.

And how fitting and ironic that it was Credit Suisse, since the US Department of Justice had on January 17 and 18 posted details of both banks’ settlements for misleading investors around RMBS sales. Deutsche of course is paying a civil penalty of US$3.1bn and providing US$4.1bn in relief to what the DoJ wonderfully referred to as “underwater homeowners” and others for a total package of US$7.2bn. CS got off with a slightly milder US$5.28bn slap (a US$2.48bn penalty plus US$2.8bn to similarly subaquatic householders).

That’s a win of almost US$12.5bn for the US government for skulduggery committed a decade and more ago. As well as a slightly stiffer penalty, Deutsche was also punished with a “Deutsche Bank’s Conduct Contributed to the 2008 Financial Crisis” sub-heading at the top of the DoJ statement, which was absent from the its note about CS.

Mind you, the DoJ’s claim that Deutsche’s agreement “represents the single largest RMBS resolution for the conduct of a single entity” was one of those slightly empty “biggest handed out on a Wednesday in January” claims. Not just because BAML reached a US$16.65bn settlement in 2014 and JP Morgan a US$13bn settlement in 2013 but also because DB ended up writing a cheque of less than a quarter of that US$14bn frightener the DoJ led with late last year.

Under the circumstances, I imagine Cryan was happy enough to write the smaller cheque and have the bank admit to making false representations even if the fine will have a US$1.2bn impact on Q4 results. For their part, Attorney General Loretta E. Lynch and the gang of officials quoted in the statement will presumably have been happy enough, over and above the cash infusion, to have slipped in some fabulously populist soundbites.

Basel dithering

As for the DB interview, I have to say there weren’t many positives to take away. Cryan’s references to “critical uncertainties” in the Basel rules around capital requirements reinforce and reflect broader industry concern about how long it’s taking to get clarity and finality on this vital element of the regulatory machinery. In the absence of full transparency, Cryan was able to use ongoing Basel deliberations to bat away the question about whether he would be forced into a capital raise (albeit with the safe “never say never” rider).

He said that neither he nor the board had had any discussions with the German government about a state bailout and also made a passing reference to sticky legacy positions the bank is still trying to work out. He said sales of non-core businesses are on the cards and made it crystal clear that fixing the bank is still a work in progress. As he said in his message to employees, “given other lawsuits, it is still too early to talk of having drawn a line under all matters”.

Even with all of the above going on, the management board’s decision to slash variable comp will still have come as a shock to the vice presidents, directors and managing directors that it affects, though perhaps less as a surprise given the DoJ settlement, while the bank is cutting headcount and while shareholders are not getting any dividends. Senior bankers will get payouts based on the bank’s overall performance but they’ll be zeroed on individual variable compensation relating to 2016.

Doing that sort of thing has, over time, always been a gamble that’s led at best to bitterness; at worst to an exodus of senior talent. Antony Jenkins famously caved in and paid Barclays bankers out in 2014 for fear of losing his star Wall Street performers (remember that death spiral comment?).

Of course times are different now. Long story short, where are they going to go? Cryan and the board still have a ton of legacy issues on their plate: having grumpy bankers walk out will probably be the least of his worries.

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