How U.S. Banks Took Over the World

A decade ago, they almost brought down the global financial system. Now they rule it.

When two of Europe’s corporate titans sat down to negotiate a merger this year, they called American banks.

Fiat Chrysler Automobiles hired Goldman Sachs Group Inc. as its lead adviser. France’s Renault SA hired a boutique bank stacked with Goldman alumni. In a deal that would reshape Europe’s auto industry, the continental banks that had sustained Fiat and Renault for more than a century were muscled aside by a pair of Wall Street deal makers.

A decade after fueling a crisis that nearly brought down the global financial system, America’s banks are ruling it. They earned 62% of global investment-banking fees last year, up from 53% in 2011, according to Coalition, an industry data provider. Last year, U.S. banks took home $7 of every $10 in merger fees, $6 of every $10 in stock commissions, and $6 of every $10 paid to hold and move corporate cash.

urope’s banks are smaller, less profitable and beating a hasty retreat from Wall Street.

From their central perch in London and with close ties to developing countries, Europe’s banks were primed to benefit as financial services went global. They charged onto Wall Street in the 1990s and pressed their advantage as U.S. banks limped out of the 2008 crisis.

Then, “they handed the whole system on a platter to the Americans,” said Colm Kelleher, the Irish-born former Morgan Stanley executive.

Coming out of the crisis, U.S. banks quickly raised capital and shed risk, unpleasant tasks that Europeans put off. American businesses recovered quickly, and its consumers are eager to borrow and spend. A tax cut in 2018 boosted profits. Interest rates have risen.

Meanwhile in Europe, regional economies are sputtering and borrowing has slowed.

Central bankers have cut interest rates below zero, which leaves banks struggling to eke out a profit on loans. Banking policy in Europe remains fractured, with national and continental regulators pursuing often conflicting agendas.

“It is not our remit to promote national, or even European, champions,” said Andrea Enria, the European Central Bank’s top banking regulator.

Twenty-five years ago, European banks charged into the U.S. They bought storied firms like Donaldson, Lufkin & Jenrette and Wasserstein Perella and dangled big paydays for rainmakers. When Deutsche Bank announced a $10 billion takeover of Bankers Trust in 1998, it promised at least $400 million in bonuses to retain top bankers.

The challenges of merging a conservative European commercial lender and a U.S. derivatives shop gave competitors pause. Goldman’s CEO, Hank Paulson, shared his doubts with a hotel ballroom of his bankers: Deutsche Bank “just signed up for 10 years of pain,” attendees remember him saying.

Henry Paulson is sworn in as Treasury secretary by Supreme Court Chief Justice John Roberts in 2006. Before he headed the Treasury, he ran Goldman Sachs. PHOTO: JIM YOUNG/REUTERS

But in an era of cheap debt and light regulation, the land grab seemed to pay off. Deutsche Bank had a $3 trillion balance sheet in 2007 and that year earned twice as much as Bank of America Corp. in securities-trading. Royal Bank of Scotland was briefly the largest bank in the world, wielding a balance sheet bigger than Britain’s entire economy.

Even the financial crisis looked at first like an opportunity. When Barclays PLC bought Lehman Brothers in a fire sale, it got 10,000 of the firm’s U.S. bankers and few of its bad debts. On Lehman’s Times Square trading floor, the loudspeakers played “God Save The Queen.” Deutsche Bank pounced on Wall Street’s clients.

The high-water mark was in 2011, when global investment-banking fees were roughly split between European and U.S. firms.

The good times didn’t last. A 2012 sovereign-debt crisis across the continent put new pressure on the region’s biggest banks. Economic growth slowed across the continent. Central bankers turned interest rates negative in 2014. German media calls them “Strafzinsen,” translating roughly to “penalty rates.”

UBS slashed 10,000 jobs and cut big parts of its trading operation. Royal Bank of Scotland fired thousands of investment bankers and sold its U.S. retail arm to focus on the U.K. Three-quarters of the Lehman bankers Barclays picked up in 2008 were gone within five years, according to Financial Industry Regulatory Authority records.

Meanwhile, U.S. banks were quietly encroaching on European rivals’ territory. In 2009, JPMorgan completed an acquisition of Cazenove, the U.K. investment bank. Every year since 2014, JPMorgan has generated more investment-banking revenue across Europe than anyone else, according to Dealogic. (The London-listed owner of Peppa Pig, a British cartoon character, hired JPMorgan Cazenove to advise on its sale in August to U.S. toy giant Hasbro Inc. )

As U.S. banks got stronger and their European rivals weakened, client loyalties began to change.

Today’s companies are increasingly global. They make more of their money in the U.S. and have swapped a shareholder register stacked with old-line European families and trusts for the likes of BlackRock Inc. and other U.S. investment giants, where Wall Street banks are better connected. The percentage of U.K. companies’ stock owned by foreigners rose from 16% in 1994 to 53% in 2016, according to government statistics.

Fiat, the Italian car maker that pursued a tie-up with France’s Renault this year, makes two-thirds of its money in the U.S.,  where it owns Chrysler. Its shots are called by John Elkann, the New York-born scion of the family that founded Fiat in 1899.

One of Mr. Elkann’s closest advisers is a Goldman Sachs banker who for the past 15 years has organized a yearly gathering of European billionaire business owners, according to people who have attended. They swap stories, share advice and, more often than not, hire Goldman for deals.

Globalization has cost the Europeans not just on headline-grabbing mergers, but in the everyday business of managing money for clients. Deliveroo, a food-delivery startup based in the U.K., sought to ramp up in Europe and the Middle East. Instead of hiring local banks in each market, it consolidated its money flows with Citigroup , which has local licenses in 98 countries and a global digital platform.

JPMorgan has made a big push to expand transaction banking for European clients. In 2010 it established a new unit of global bankers to pitch day-to-day transaction services to big companies, and later took over dozens of European transaction relationships from RBS.

UBS’s Stamford, Conn., trading floor in 2005. It was able to accommodate 1,400 traders and staff. PHOTO: RICK FRIEDMAN/CORBIS/GETTY IMAGES

Most recently JPMorgan said it is extending its commercial banking business globally, targeting hundreds of midsize businesses across Europe. It has sought to take on a more local flavoring, doing things like sponsoring math-and-science programs for students in France, Germany and Italy.

Last year, Citigroup and JPMorgan were two of the three biggest providers of day-to-day transaction banking globally, along with Britain’s HSBC Holdings PLC, according to Coalition. U.S. banks accounted for 57% of the global transaction-banking revenue pool among the biggest banks in that business, versus 22% for Europeans, Coalition said.

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Shannon McConaghy of Horseman Capital paints a dour picture of the Japanese banking system. He reveals the accounting tricks that have allowed these banks to survive in a predominantly negative-interest-rate world, and discusses why credit costs are finally rising. Shannon warns of a potential meltdown that could have far-reaching ramifications, in this conversation with Real Vision’s Roger Hirst. Filmed on July 11, 2019 in London.

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Banks Plan to Boost Campaign Spending in 2020

With the financial crisis fading, firms renew political engagement for presidential election year

WASHINGTON—Banks plan to be more active in the 2020 elections, with a large industry group promising to boost campaign spending and political advertising after keeping a relatively low profile in the decade after the financial crisis.

The industry’s re-emergence in the political arena comes amid a friendlier tone in Washington during the Trump administration. Congress and financial regulators have sought to ease capital rules, limits on trading and other restrictions placed on banks by the Obama administration after the 2008 crisis, arguing the financial system is more resilient now.

“They’re using the current thaw in what had been a pretty contentious relationship between Wall Street and D.C. to tell their story a little better,” said Ed Mills, managing director at Raymond James Financial.

The American Bankers Association, a trade group that represents banks of all sizes, said it plans to spend more than $10 million in the 2020 election cycle on its political program, including donations and advertisements to back Republicans and Democrats in congressional races. The amount also includes operational costs that aren’t subject to federal filing requirements; the group declined to say how that total compares with its spending in previous election cycles.

“Our goal is to support candidates who understand and appreciate the critical role banks of all sizes play in the economy,” Rob Nichols, the ABA’s chief executive, said in a statement. “We plan to expand our efforts in 2020 on a rigorously bipartisan basis.”

Banking on 2020 The American Bankers Association has increased political donations ahead of the2020 election. Contributions to federal candidates and other political committees Source: Federal Election Commission Note: Donations January through July in the first year of each two-year election cycle.
20062008201020122014201620182020$0 million$0.5$1$1.5

In the 2018 midterm election cycle, the ABA spent more than $1.5 million on political ads, polling and other research, the group said. In addition, it contributed $3.5 million to candidates and other political committees, according to Federal Election Commission filings.

The group backed four Democratic and eight Republican candidates, including Dean Heller, a former Republican senator from Nevada, and Sen. Jon Tester, a Montana Democrat.

So far this year through the end of July, it contributed  $1.31 million to federal candidates and political committees, the fastest its donations have topped $1 million since at least the 2010 cycle, according to Federal Election Commission data.

The group also contributed $10,000 each to the Democratic Congressional Campaign Committee and the Democratic Senatorial Campaign Committee, and $15,000 a piece to the National Republican Congressional Committee and the National Republican Senatorial Committee. The group declined to comment on the difference in the amounts.

The Consumer Bankers Association, which represents big and regional banks, expects to raise upwards of $200,000, on par with previous years, and the Independent Community Bankers of America, representing smaller banks, said it plans to focus more on social-media ads in 2020.

The American Bankers Association ran an ad backing U.S. Rep. Ted Budd (R., N.C.) in his successful 2018 re-election race. PHOTO:WOODY MARSHALL/ASSOCIATED PRESS

The ABA’s advertisements in the 2018 cycle included one supporting Rep. Ted Budd (R., N.C.) that featured Kelly Earnhardt Miller—a North Carolina banker and the daughter of race-car legend Dale Earnhardt. The group also ran Spanish-language video ads and a print ad in Vietnamese in support of Rep. Lou Correa (D., Calif.).

So far this election cycle, the ABA is the biggest political action committee in terms of donations to federal candidates, according to the Center for Responsive Politics.

Goldman Sachs recently released a documentary commemorating its 150-year history, while JPMorgan Chase & Co. sponsored a multimedia Politico article about its community development initiatives in Detroit.

The industry’s efforts haven’t always hit their marks. “ Is Bank of America really sponsoring this?” Sen. Bernie Sanders (I., Vt.), a 2020 presidential candidate who has advocated for breaking up big banks, said at a July Washington Post event on the presidential election, with the bank’s logo overhead. “Well, let’s just get into the interview,” journalist Robert Costa replied, to audience laughter.

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The industry has pressed for regulatory victories by focusing on what it says are burdens faced by small and midsize banks, arguing that lower costs to comply with rules and regulations could mean more loans are made to small businesses and consumers. Last May, this approach led to bipartisan support for the most comprehensive rollback of the financial rulebook since the crisis.

“We’re far enough away from the financial crisis,” Heidi Heitkamp, a Democrat and then-senator who backed the bill, said in an interview. “We definitely have normalized the discussion, taking it out of a hyper, you-caused-this-and-you-should-be-punished to a discussion about what works for American consumers.”

The power split in Congress—Democrats control the House, Republicans control the Senate—has complicated efforts by banks to lobby for their policy priorities. Some progressive Democrats on the House Financial Services Committee, for instance, are shunning political donations from the industry.

“We’re still in the early-stage process of developing relationships with all of them. Some we haven’t met,” Richard Hunt, the head of the Consumer Bankers Association, said of new lawmakers of all stripes in an interview. “Eighty percent of my so-called lobbying time is with regulators.”

Rewrite of Bank Rules Advances Slowly, Frustrating Republicans

Many efforts to retool postcrisis financial rules remain unfinished; Republicans want faster action

.. Daniel Tarullo, the Fed’s regulatory point-person during the Obama administration, in May said postcrisis rules “could be endangered by a kind of low-intensity deregulation consisting of an accumulation of non-headline-grabbing changes and an opaque relaxation of supervisory rigor.”Under the law passed a year ago, regulators face a fall deadline to simplify rules for midsize and small banks. They also want to make progress by year’s end to retool rules that limit speculative trading by large firms and test the ability of firms such as J.P. Morgan Chase & Co. or Goldman Sachs Group Inc. to continue lending during a severe recession.

Overall, regulators say they are moving as fast as they can on more than 30 changes affecting the financial sector. The proposed changes, they say, would better calibrate postcrisis rules under the 2010 Dodd-Frank financial law without undermining the financial system.

“We’ve been working on a regulatory restructuring that is aggressive in its scope but responsible in its substance,” Federal Reserve Vice Chairman Randal Quarles said.

The pending changes include simplifying annual stress tests and eliminating a system of giving pass-or-fail grades to the big banks that take them, both industry victories. Another change would ease a rule that requires big banks to plan annually for their own demise, allowing the largest U.S. firms to produce full so-called living-will plans every four years rather than annually. Regulators also are changing a rule adopted to curb excessive borrowing at eight of the largest U.S. banks.

..  In some cases, regulators’ attempts at changing rules have been derailed by lukewarm support from Wall Street. The effort by Commodity Futures Trading Commission to overhaul postcrisis derivatives rules has stalled largely because major banks and trading firms have become accustomed to current rules and aren’t eager to change their business models.

Similarly, banks objected to a plank in the rewrite to the Volcker rule, the prohibition on lenders making risky “proprietary” bets. The pushback has led regulators to consider proposing a revised version, according to people familiar with the process.

Trump-appointed officials are also spending some of their time finishing rules mandated by the Dodd-Frank law that weren’t completed during the Obama administration. That means advancing restrictions in a more industry-friendly way than if Democratic appointees still held the rule-writing pen.

The Securities and Exchange Commission last week finished work on a rule raising standards for investment advice by stockbrokers. A federal court had voided a tougher version by the Obama administration that applied to retirement-savings advice. Trump appointees at the Consumer Financial Protection Bureau also rewrote an Obama-era rule for payday loans, removing a requirement that would have made it difficult for companies to offer high-cost consumer loans.