Macaskill on markets: World Cup of banking
By Jon Macaskill
As the World Cup shapes up to be the main sporting event of 2014, Euromoney columnist Jon Macaskill looks at comparisons between investment banks and football teams for clues to competitive match-ups in the year ahead.
Goldman Sachs – Spain Like the Spanish football team, Goldman Sachs has a reputation for fielding flair players who are encouraged to work together and can produce dazzling results when they are on form. Banking aficionados still recall the great long bonds trade of 2009, when Goldman took advantage of signals from contacts in government and fatigue among competitors after the gruelling season of 2008 to load up on any and every form of debt to produce fixed-income revenue of $23.3 billion.
Sadly, key players such as macro maestro Ashok Varadhan, one-time star of FX and rates trading, have been in surprisingly poor form recently. Goldman's third-quarter fixed-income revenue collapsed almost 50% and the bank was struggling to even stay in the top five for that league, a slump that would have once seemed almost inconceivable.
A recovery in 2014 is always a possibility given the quality of the Goldman squad, but it faces another threat in a possible lack of motivation among a roster of ageing stars. CEO Lloyd Blankfein can still dazzle with his pirouettes, but if he decides to retire to Florida there are questions over whether the remaining flair performers will want to take direction from president Gary Cohn, a feared defensive enforcer who seems determined to play on until he finally gets the captain's armband.
Potential issues: Refereeing standards. The Volcker Rule has finally been released and seems set to stifle creative interpretation of regulations by banks. This might hurt Goldman, which has traditionally taken the view that what referees don't see can't hurt them. Goal-line technology to prove when a hedging trade has actually turned into a prop bet could lead to some tight decisions going against Goldman.
JPMorgan – Brazil
Brazil has won more football World Cups than any other team and JPMorgan remains the firm to beat in terms of overall investment banking performance. Even a spectacular $6.2 billion own goal in 2012 by Bruno 'The Whale' Iksil wasn't enough to dislodge JPMorgan from its revenue top spot that year and the firm cruised to another league table victory in 2013. Just as Brazil should expect to perform well, given that it is a nation of 200 million football fanatics, so JPMorgan has natural advantages in banking as it deploys 250,000 staff and its $2.5 trillion Fortress balance sheet. Years of success have made the bank a target for ambitious up and comers, however. Regulators and former clients are currently forming a line to lighten the bank's pockets with fines and legal claims, and there is a risk that litigation problems could distract JPMorgan from the main action on the field.
Potential issues: Overconfidence. From credit default swap trading to commodities, JPMorgan has demonstrated a tendency to over-estimate its ability to beat middle-of-the-road teams. A recent assessment by JPMorgan team mascot and vice-chairman James 'Jimmy' Lee of his CEO, Jamie Dimon, showed that this remains an issue at the firm. "Jamie Dimon isn't just the Pele of modern banking, he is also the Michael Jordan, the Babe Ruth and the Muhammad Ali," Lee said. "The great thing about Jamie is he can play in goal or up front, while simultaneously controlling midfield."
UBS – Portugal
Portugal almost failed to qualify for the 2014 World Cup and UBS is arguably lucky to remain a banking contender at all after stumbling from one trading disaster to another. In the wake of $50 billion of MBS and credit losses, then a rogue-trading scandal that cost $2.3 billion, CEO Sergio Ermotti was expected to set his team up in a defensive formation that stressed stable wealth management revenues at the expense of investment banking raids down either wing. That made the hiring of star investment banker Andrea Orcel in 2012 all the more puzzling. Orcel is the Cristiano Ronaldo of the banking world – a talented performer who is all too obviously infatuated with his own looks and ability, and often fails to realize that he has team-mates who might be in a better position to score. The man they called 'Show Pony' when he was at Merrill Lynch can deliver big results when he is on form, but has a tendency to fade from play when his team is struggling.
Potential issues: Over-reliance on goals from a single source. 'Cristiano' Orcel led the investment bankers at UBS to a surprisingly strong performance in 2013, but the results were flattered by comparison with weak previous years and reliance on jumbo trades, such as a complex loan/derivatives trade/punt on insurance firm Ping An. Trades like these are the equivalent of overhead kicks or 30-yard shots in football – wonderful to watch when they come off, but no substitute for consistent performance in the middle of the park.
Bank of America – USA
Statistics show that Team USA is one of the more consistent performers in football (or soccer as it is known to its local adherents), reliably qualifying for World Cup tournaments and normally performing creditably. Similarly, Bank of America can point to revenues and league table rankings that place it towards the top tier of investment banking. But neither side gets much respect, in part because the game just does not seem to come naturally to them. Both have turned to outside coaches who played at the highest levels earlier in their careers to try to raise the quality of their existing staff, with similarly mixed results. Jurgen Klinsmann, the former star striker and manager of the German national football team, makes little effort to hide his dissatisfaction with the limited technical abilities of many of the players he inherited when he agreed to coach Team USA. And 'Stormin' Tom Montag, a former swaps trader and global securities co-head at Goldman Sachs who once inspired fear and envy in equal measure on rival dealing desks, faces similar problems in his current role as head of corporate and investment banking at Bank of America.
Potential issues: Attack-minded players may over-correct to a defensive coaching stance. Disdain for the abilities of team members who are plainly viewed as second rate can lead a player who demonstrated attacking swagger to over-correct to a defensive mindset once he is a coach. Montag's task is complicated by working for a group CEO – Brian Moynihan – who has a legal background and played rugby at college in the US, thus showing no early affinity for either banking or any of the top-10 sports played in America. And with Goldman Sachs in apparent decline it is not clear if Montag is still motivated to gain revenge on the former colleagues who ousted him from the firm in 2007.
Deutsche Bank – Italy
Germany's powerhouse football team might seem an obvious analogy for Deutsche Bank, whose fixed-income sales and trading juggernaut has become known for crushing its competitors, at least on its home turf in Europe. But there are also comparisons to be made with the Italian national team, with its tradition of pitiless managers who preside over an uneasy coalition of mercurial attacking players and disciplined defenders. The dark arts of catenaccio (the 'door-bolt') are a trademark of Italian football, and Deutsche Bank has always earned grudging respect for an ability to prevent regulatory problems or conflicts of interest from hampering its business, while working with a perilously low capital base. This strategy can leave a side dangerously exposed once its defensive lines are breached, however.
Potential issues: Match-fixing allegations/transition in key areas. Deutsche Bank faces multiple allegations of involvement in fixing of benchmark rates. It paid the highest fine in the recent European Commission crackdown on Euribor manipulation and is among the biggest players in other areas under investigation, such as foreign exchange. The bank's attempts to freshen up key business lines have also met with mixed success. A move to place credit staff under the supervision of inexperienced rates coaches led to widespread player dissatisfaction, for example. Morale was hurt further when the entire commodities team was placed on the transfer list and remaining players were told to train in a car park in Birmingham.
Barclays – England
Like the English football team, Barclays tends to dwell on past glories and is run by an uncharismatic coach who was not the first choice of players or fans. Expectations for future performance are low, however, which might be a saving grace in the coming competition. Barclays generated a respectable £8.5 billion ($13.9 billon) of investment banking revenue in the first nine months of 2013, down only slightly from 2012, despite the departure of many senior staff in the wake of the firing of former CEO Bob Diamond. Just as Diamond no longer has to pretend that he supports Chelsea football club, so the worker bees at Barclays seem to relish being freed from unrealistic expectations of investment banking glory and are quietly getting on with the boring task of servicing clients. Tipped by some for a decent cup run.
Potential issues: Lack of spark. Antony Jenkins was appointed CEO of Barclays to serve as a safe pair of hands after the thrills and spills of the Diamond era, for much the same reason as the decision to give Roy Hodgson the job of England manager. Both appointments test the theory that it doesn't really matter who is at the top of a competent organization. Their lack of spark could pose issues in terms of motivating players, however. There is already talk that some Barclays bankers are refusing to sit through any more meetings about standards and ethics, which could be a sign of approaching dissent by key performers.
RBS – Scotland
Scotland failed to qualify for the 2014 World Cup for the fourth time in a row and RBS has effectively pulled out of contention in global investment banking, but both outfits are obliged to show up for pointless matches that are often distressing for fans and players alike. The Scottish football team finally has a competent manager in Gordon Strachan and might be able to chart a course as a solid second-tier performer with limited but achievable ambitions to qualify for a future tournament. RBS is in much worse shape. It is unloading non-core assets, but seems doomed to existence as a zombie bank without even the prospect of an early return to private ownership to encourage gloomy employees.
Potential issues: No decent players. RBS managed to find a manager with a Scottish name to take over as CEO from Stephen 'Clearances' Hester, the fox-hunting Englishman who finally tired of government officials shouting conflicting advice from the sidelines. It later emerged that Ross McEwan was actually from New Zealand and had little experience in wholesale banking, which does not augur well for future signings. Unsettled finance director Nathan Bostock swiftly put in for a transfer to Santander and other remaining veterans are expected to follow suit.
Opinion OpinionMacaskill on MarketsBank of America Merrill LynchJanuary 2014
Jon Macaskill
Jon Macaskill is a leading financial journalist with more than 25 years' experience covering banking and markets from London and New York. He was named Best Editorial Commentator in 2016 State Street Institutional Press Awards for his monthly column in Euromoney
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