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.

Jeffrey Epstein’s Road Through Wall Street Was a Bumpy One

Financier’s business relationships with investment banks sometimes turned sour, ending in lawsuits

Jeffrey Epstein worked closely with some of the world’s largest investment banks to build a fortune of more than $500 million. But he cut a course through Wall Street that was marked by disagreements, lawsuits and acrimony.

On the heels of his suicide, lawyers and others involved in the case expect the sex-trafficking investigation to expand into Mr. Epstein’s lengthy financial dealings. Federal investigators have obtained Mr. Epstein’s financial records from at least one bank, and a close look at his finances may help answer murky questions unresolved after his death:

  • How did he make his money?
  • Who worked with him and when?

Mr. Epstein left Bear Stearns Cos. in the early 1980s. He struck out on his own but used the firm for dozens of transactions, former Bear Stearns executives said. For years, Mr. Epstein enjoyed a close bond with James Cayne, these people said. Mr. Cayne, who became the chief executive in 1993, sometimes called underlings to ask that they “take care of” Mr. Epstein, one former executive recalls. Mr. Cayne didn’t respond to requests for comment.

Jeffrey Epstein’s Troubled Wall Street History

He wanted the best deal in the entire world anyone has ever seen,” the former employee said, calling him “ferocious” and “a tiger” in his conduct.

Mr. Epstein’s relationship with Bear Stearns came apart as the firm did. He had put his own money into two Bear Stearns hedge funds and owned shares in the bank itself. He lost $57 million in the funds, and his firm still held 100,000 shares when Bear Stearns was sold for $2 a share to JPMorgan Chase & Co. in March 2008.

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As the bank’s problems deepened in August 2007, Mr. Epstein sold more than 56,000 shares at a price of $101. He intended to sell more, he later said in a lawsuit filed in the Virgin Islands, but in a series of phone conversations, Mr. Cayne insisted that Mr. Epstein retain the rest of his shares, arguing that the firm’s problems were contained, Mr. Epstein’s complaint said.

Mr. Epstein also filed a complaint before the Financial Industry Regulatory Authority against former Bear Stearns Co-President Warren Spector. A judge in the Virgin Islands ordered the transfer of Mr. Epstein’s lawsuit to the Southern District of New York for its inclusion in a class-action suit filed against the bank. The lawsuit was ultimately dismissed.

By 1999, Mr. Epstein himself was a client of Citigroup’s private bank. That year and in 2000, Ms. Davison helped Mr. Epstein receive two $10 million loans that he used to invest in a debt-related vehicle called a collateralized bond obligation as well as in an investment fund, both managed by outside parties, according to the lawsuit.

By 2002, the investments were in trouble. Mr. Epstein defaulted on both loans, even after Citigroup extended their repayment deadlines, the bank later claimed. Mr. Epstein filed a lawsuit in District Court of the Virgin Islands claiming Citigroup had defrauded him and misrepresented information related to the investments, which he said had been made on the recommendation of Ms. Davison, who “aggressively solicited my participation.” Through a spokeswoman, Ms. Davison declined to comment.

Citigroup filed its own suit in the Southern District of New York for repayment of the loans. Both parties dropped their suits in 2005. Mr. Epstein’s relationship with Citigroup was severed in 2006, according to people close to the matter, around the time Mr. Wexner stopped working with Citigroup, the people say. A spokesman for Mr. Wexner declined to comment.

“Mr. Epstein was a client for a short period of time, before his abhorrent behavior came to light,” a Citigroup spokeswoman said.

From the 1990s through about 2013, Mr. Epstein had a relationship with JPMorgan, one that proved lucrative for the bank. The Wall Street Journal previously reported that JPMorgan gained a stream of private-banking clients and referrals from Mr. Epstein. The bank ended the relationship in the midst of concern about its reputation, the Journal reported, years after a 2007 nonprosecution agreement with the government related to a Florida sexual-misconduct investigation into Mr. Epstein.

A spokesman for the bank declined to comment.

Soon, Deutsche Bank AG was helping Mr. Epstein move millions of dollars in cash and securities through dozens of private-banking accounts, playing a key role in his financial dealings, the Journal also reported. The German bank severed its relationship with Mr. Epstein this year, the Journal reported.

Deutsche Bank has said it is “closely examining any business relationship with Jeffrey Epstein, and we are absolutely committed to cooperating with all relevant authorities.”

It wasn’t just banks with whom Mr. Epstein had fraught business relationships. Mr. Epstein sued a powerboat company about modifications, was sued by a New York law firm for unpaid bills and fought with an interior designer hired to work on his 70-acre property in the U.S. Virgin Islands. (Mr. Epstein dropped the powerboat suit, was ordered by a judge to pay the law firm and settled with the interior designer.)

“It was a nightmare,” said Juan Pablo Molyneux, the interior designer, who installed a bronze desk for Mr. Epstein, along with velvet, upholstered chairs, terrestrial globes with designs based on a John Ford movie and bronze cabinetry with shapes of marine fauna.

He described Mr. Epstein as an unpleasant client who was very insecure and would constantly change his mind.

“It was dreadful, exhausting and abusive,” Mr. Molyneux said.

Trump Should Be a Better Boss

“The Deep State,” on the other hand, is a description of the millions of bureaucrats immune from the political ebbs and flows. The term is meant to suggest that these men and women are pursuing agendas that run contrary to the preferences of the president, the peole who voted for him, or the nation at large.

.. We can debate whether and how much the Deep State is actually countering Trump’s agenda. But one thing that is not debatable is that the anonymous author is not part of such a group. Anonymous is, rather, a “senior administration official” who, based on what his  op-ed reveals, serves at the pleasure of the president. Trump could get rid of him, if he knew who he was.

.. Instead of rebuking Anonymous with the same complaints many conservatives have lobbed at the career officials at the Department of Justice, we could instead see his op-ed as an illustration of the inherent principal–agent problem that every president must confront. And the essay strongly suggests that Trump is struggling with this problem.

.. Simply stated, the principal–agent problem arises whenever any principal deputizes an agent to do his bidding. How can the principal make sure that the agent is actually doing what he has been tasked to do? Well, it requires monitoring and sanctions — both of which are costly to the principal.

.. Indeed, the differences between presidential success and failure often come down to how the president handles the monitoring of his staff. Jimmy Carter, for instance, was an unsuccessful president in no small part because he was a micromanager.

.. Dwight Eisenhower, on the other hand, imported organization structures from the military to great success. More recently, in Confidence Men, Ron Suskind reported that Barack Obama instructed U.S. Treasury Secretary Tim Geithner to draw up a plan to dissolve Citigroup; however, Suskind claimed, Geithner ignored the order, and Obama never followed up. That is the principal–agent problem in action.

.. These are all symptoms of an executive branch that is suffering from a lack of sufficient management.

.. If Trump does not have a good handle on what his agents are up to, then his power necessarily is going to decline, as the principal–agent problem grows. We can bemoan the fact that his political appointees are undermining democratic accountability by ignoring or circumventing Trump’s dictates, but that misses the point. The principal–agent problem exists just about everywhere. It is a consequence of human nature, whereby people are prone to put their own judgments and interests first. That’s why principals must monitor their agents.

Facebook to Banks: Give Us Your Data, We’ll Give You Our Users

Facebook has asked large U.S. banks to share detailed financial information about customers as it seeks to boost user engagement

The social media giant has asked large U.S. banks to share detailed financial information about their customers, including card transactions and checking account balances, as part of an effort to offer new services to users.

Facebook increasingly wants to be a platform where people buy and sell goods and services, besides connecting with friends. The company over the past year asked JPMorgan Chase JPM +0.33% & Co., Wells Fargo & Co., Citigroup Inc. C +0.28% and U.S. BancorpUSB +0.43% to discuss potential offerings it could host for bank customers on Facebook Messenger, said people familiar with the matter.

Facebook has talked about a feature that would show its users their checking-account balances, the people said. It has also pitched fraud alerts, some of the people said.

.. Facebook has told banks that the additional customer information could be used to offer services that might entice users to spend more time on Messenger
.. Facebook said it wouldn’t use the bank data for ad-targeting purposes or share it with third parties.
.. Banks face pressure to build relationships with big online platforms, which reach billions of users and drive a growing share of commerce. They also are trying to reach more users digitally. Many struggle to gain traction in mobile payments.Yet banks are hesitant to hand too much control to third-parties platforms such as Facebook. They prefer to keep customers on their own websites and apps.

.. As part of the proposed deals, Facebook asked banks for information about where its users are shopping with their debit and credit cards outside of purchases they make using Facebook Messenger,

.. Alphabet Inc.’s Google and Amazon.com Inc. also have asked banks to share data if they join with them, in order to provide basic banking services on applications such as Google Assistant and Alex
.. Bank executives are worried about the breadth of information being sought, even if it means not being available on certain platforms that their customers use. It is unclear whether bank customers would need to opt-in to the proposed Facebook services or what other privacy protections might be offered.
.. In recent years, Facebook has tried to transform Messenger into a hub for customer service and commerce,