Transatlantic competition is nothing new, even in a global industry like investment banking. Ever since the US firms set up in London in the 1970s and 1980s, and started buying up the merchant banks (IBD), and the stock brokers (sales) and jobbers (trading), it has mostly gone in favour of the US firms.
Many institutions have mounted assaults in the other direction — Credit Suisse buying DLJ, Deutsche buying Bankers Trust, RBS buying Greenwich, UBS buying Dillon Read, and most recently, Barclays and Lehman — but none have smashed their way into a consistent top five position in the way that the top US firms dominate EMEA investment banking.
Plenty of popular theories do the rounds. Cultural fit is one pleasingly nebulous explanation; some kind of regulatory distortion is another. US and EU firms seem to each act like global regulation is uniquely disadvantageous to them, and they need a special deal from their regulators. US banks can sell their mortgages to Fannie and Freddie; EU banks can magic them away with internal models.
Some also argue that it’s the very strength of the US capital market that allows US firms to dominate investment banking internationally. Consistent high fee generation, a willingness of issuers to “pay for good service”, frees bank management to pursue aggressive expansion elsewhere.
This seems implausible to GC; it posits that the same hard-charging US rainmakers who have such a tight grip on the top tier of the US capital markets are happy to pour some of their P&L into helping their EMEA colleagues climb the ladder.
It also ignores the vastly more successful mergers and integrations that the US banks undertook — JP Morgan’s acquisition of Cazenove, or Citi’s of Schroders seem to have genuinely improved the capabilities of both sides in the long run.
Anyway, despite Deutsche’s new €8bn of capital, this looks set to continue. Southpaw this week looked at Morgan Stanley’s 40 years in London, and the firm’s challenges ahead. The bold strategic bet on cutting fixed income looks less smart, now rate hikes have perked up revenue there, but it may still prove the best call in the long term. The core of the firm’s investment banking business, fixed income or not, continues to thrive though, despite JP Morgan luring Michele Colocci, the chairman of M&A for EMEA, a few metres down the road to become co-head of healthcare investment banking and co-head of the industry coverage team for corporates.
Citi is also in the market to hire M&A bankers, though it’s had a more turbulent time in EMEA than some of the other American firms. Since 2014, though, it has been putting the pedal to the metal, hiring senior bankers and recommitting balance sheet, particularly to its financial sponsors and leveraged finance business — a crucial building block for any full-service banker. It just announced it had hired Shawn Borisoff from UBS for sponsors coverage, and that this meant the senior hiring in sponsors, which began with Anthony Diamandakis from Credit Suisse in 2014, is largely complete.
The UK’s sale of Bradford & Bingley’s mortgage assets, financed by the UK majors, illustrates the strength of the US houses today. The securitization takeouts were arranged and will be jointly led by Citi and BAML — a prestige mandate awarded in open competition. Goldman, meanwhile, joined the deal through a different, more subtle, and more lucrative route, taking 5% of the deal to comply with risk retention in the financing for Blackstone’s £10bn piece of the purchase, and getting paid the coupon on those bonds, plus a running coupon of 9bp across the whole book. It’s an elegant solution to a regulatory challenge — and something which the securitization market is sure to see more of in future.
Of course, one theory about the present dominance of US firms has to do with capricious and discriminatory US conduct fines.
The Department of Justice’s RMBS fines are frequently seen as discriminatory against the Europeans (Bank of America’s colossal payments for mortgage misdemeanours at Countrywide are usually forgotten when this theory is expounded).
It’s also possible, at least, that this contributed to the vicious repo squeeze at the end of 2016, which saw certain French and German repo levels print as tight as -8%.
The International Capital Market Association describes it as a “broken market”, which may have been eroded by persistent purchases of public sector bonds by banks, as well as regulatory standards for liquidity and leverage which focus on quarter-end or year-end balance sheets.
But Credit Suisse and Deutsche both headed into year-end expecting major settlement announcements with the Department of Justice, and this meant they ran huge surpluses of liquid assets into the announcements on December 23, covering against market disruption like that which Deutsche experienced in September and October last year.
These positions could not have been unwound ahead of year end in the thin liquidity between Christmas and New Year, leaving the market even more short of unencumbered quality collateral than usual, and leaving repo rates to spike.
More Brexit news as well, in the shape of sabre-rattling over euro clearing from a German MEP, who insisted that it must take place in the eurozone after Britain leaves the European Union. It's not entirely clear that the ECB, or any other European authority, can force this to happen, but life can certainly be made awkward for those that wish to clear euros outside the eurozone, even if it can't be banned.
GC isn't sure that it actually matters as much as partisans of both sides seem to think, though. Xavier Rolet, the chief executive of the London Stock Exchange, managed to get up to the bizarre claim that 100,000 jobs depend on clearing euros in London; given that his own firm's LCH Clearnet charged clearing fees of €376m last year with 926 employees, there's a hell of a multiplier at work there.