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.
- Germany’s Deutsche Bank AG is firing thousands of investment bankers.
- Switzerland’s UBS Group AG abandoned its huge trading floor in Stamford, Conn., to refocus on its roots as a private bank.
- Barclays is the lone holdout with an ambition to be a universal global bank. Under Chief Executive Jes Staley, an American who rose to prominence at JPMorgan Chase & Co., the bank has resisted shareholder calls to go back to its roots serving British consumers and companies.
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.
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.
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.
The Federal Reserve Board of Governors has barred former Goldman Sachs Group Inc. investment bankers Tim Leissner and Roger Ng from working in the banking industry because of their alleged involvement in illegally diverting funds from Malaysian state investment fund1Malaysia Development Bhd.
The Fed said Tuesday Mr. Leissner, the former head of Goldman’s Southeast Asia business, agreed to his ban from the industry and has been fined $1.42 million.
In 2012 and 2013, Messrs. Leissner and Ng worked on bond offerings for the sovereign wealth fund, known as 1MDB, the Fed said. Money that was diverted from the fund was used to bribe government officials and for the “conspirators’ personal benefit,” the Fed said in a statement.
The New York-based investment bank raised $6.5 billion for 1MDB, and authorities have alleged $2.7 billion of funds were stolen.
.. Mr. Leissner pleaded guilty last year to U.S. charges of conspiracy to launder money and violate antibribery laws. He is due to be sentenced June 28. The attorney general in Malaysia filed charges against the former Goldman banker last year.
When Goldman Sachs went to their shareholders with the 10,000 women program ..
I actually think that it is there job to be companies and society’s job to look after the public good.
Companies will primarily act for profit so other countervailing forces must.
A little bit of demonization of people who are stealing the dream is fine.
Trump and plutocrats are demonizing immigrants (punching down) instead of doing something to address the problem.
In an interview on CBS News’ 60 Minutes on Sunday to promote the release of his book called Why I Left Goldman Sachs: A Wall Street Story, Smith said that securing an unsophisticated, or “muppet” client was the top goal of the bank’s salespeople. His frustrations with that culture meant he “literally wanted to hit the board of directors over the head”.
“Getting an unsophisticated client was the golden prize,” he told the programme. “The quickest way to make money on Wall Street is to take the most sophisticated product and try to sell it to the least sophisticated client.
“What Wall Street will do is they will approach one of these philanthropies or endowments or teachers’ retirement pension funds in Alabama or Virginia or Oregon and they’ll say to them: ‘We have this great product that is going to serve your needs’. And it looks very alluring to these investors but what they don’t realise is that upfront they are immediately paying the bank $2m (£1.2m) or $3m because of their lack of sophistication.”
Smith was no more than a mid-ranking employee when he penned his March article, which is best remembered for his claim that Goldman bankers in London frequently dubbed unsophisticated clients as “muppets”.
“Within week one [of arriving in the London office] I met a junior guy who was 24, 25 years old and the first thing he’d told me was that he had just traded a sophisticated derivative with a ‘muppet client’ who’d paid the firm an extra million dollars because the client was so trusting that he didn’t check the price with other banks,” Smith recalled. “Now you could think to yourself, is this some rogue guy who is just talking callously about clients, but his boss who’s a managing director was sitting right next to him nodding and chuckling along.”
Smith also recalled how he and a Goldman partner travelled to Asia to meet a major client, described as the “head of one of the biggest funds in the world”.
“[The client] looks me and the partner in the eye and says: ‘Let me be honest with you guys. We don’t trust you at all. But don’t worry, there’s nothing to worry about, we’re going to keep doing business with you because you’re the biggest bank, you’re the smartest and factually we have to do business with you’.
“Now my jaw almost dropped because hearing from one of your biggest clients that they don’t trust you when your whole mantra and reputation is built on trust, to me was the worst possible thing that you can hear. And then I leave the meeting and the partner from Goldman Sachs, who I was with, is jubilant. This is great news. The client is going to keep doing business with us because they have to.”
Goldman declined to give CBS a response to its Smith interview. However, the bank’s board has already been told that an internal investigation triggered by Smith’s resignation – which was dubbed the “muppet hunt” – had found little substance to the allegations.
The bank has also been briefing that Smith had been angling for a promotion and for the bank to double his pay to $1m, although Smith claims he would have quit even if his pitch had been successful.
“What I can say to you, and this may sound stupid, is that I didn’t go to Wall Street purely to make lots of money,” he said. “I definitely wanted to make money, but I left because things had veered so far from what I actually believed was right. I could have just left and walked out and said nothing about it but I would have felt that that was not the right thing to do.”
Along with several other major Wall Street banks, Goldman has been widely criticised for making money at the expense of clients who did not fully understand the complex financial products they were dealing with.
In 2010 Goldman was fined $550m as part of a settlement with the Securities and Exchange Commission – the largest in the US regulator’s history – when the bank accepted that the marketing materials it issued to investors for its infamous Abacus transaction gave “incomplete information”.
The Abacus case had called into question the integrity of Wall Street after the commission alleged Goldman had packaged up mortgages into Abacus and then sold them to investors without telling them that one of its powerful clients, the hedge fund Paulson, had been taking a trading position intended to profit from a fall in the value of US house prices and had even selected some of the mortgages included in the product.