(Bloomberg) -- The gossip inside the Beverly Hills Hilton kept taking an unexpected turn -- toward, of all things, Deutsche Bank AG.
In chandeliered conference rooms and marble-floored hallways, Wall Street A-listers chatted, with no shortage of schadenfreude, about the German bank’s recent capitulation: After two decades trying to build one of the world’s top investment banks, it’s settling for something less -- and may eliminate thousands of jobs, especially in the U.S.
Front of mind for many of its rivals attending the Milken Institute Global Conference: Can Deutsche Bank protect the U.S. businesses it wants to keep? And if not, who’s worth poaching?
Back inside the firm’s U.S. headquarters in Manhattan, that prospect is now weighing on Deutsche Bank executives who concede that a drumbeat of bad news, and potential for more, is taking a toll on morale. Several, speaking on the condition they not be identified, said they worry staff will start to defect to rivals -- or, worse, that big clients might do that themselves.
In the weeks since Deutsche Bank outlined its fourth global turnaround plan in three years, a picture is emerging of mounting uncertainties within the U.S. operations as executives make decisions on firings. The company’s April 26 announcement that it will probably shrink global equities trading, and in America scale back rates and corporate financing businesses, should’ve provided staff some clarity. But in the days since, many are realizing those are just the biggest of many changes afoot.
As if to underscore the point, the bank announced late last week that it plans to abandon its U.S. headquarters on Wall Street for smaller digs in midtown Manhattan. Days later, people close to the firm said job cuts may be expanded to affect about 20 percent of the U.S. workforce. And despite the firm’s guidance on where it will shrink most, other desks may yet be surprised by incremental cuts as the bank unwinds some past efforts to build.
The U.S. division, for example, will probably end up firing some of the dealmakers it lured with multimillion-dollar compensation packages in recent years, according to executives, who, like others inside Deutsche Bank, spoke on the condition of anonymity to avoid jeopardizing their careers.
Already last week, the bank told staff it would close its Houston office. Not even four years ago, it made a big investment in that business, poaching a team of oil and gas bankers from Citigroup Inc. One senior executive emphasized that the bank still views its presence in New York, San Francisco and Chicago as indispensable for its corporate finance units.
Chief Executive Officer Christian Sewing, who took the helm in April, flew to New York early this month to bolster morale and dispel rumors swirling within the bank about a wholesale withdrawal from the Americas. Over three days, he addressed staff, consulted with business heads, greeted investors and hosted a select group of clients for dinner at a restaurant in Midtown.
“Rumors or the impression that we’re leaving the U.S. or that we’re turning New York into a small hub are plain wrong,” he told employees at a town hall meeting. So far, several executives said afterward, Sewing is striking the right notes.
Competitors are mistaken if they think Deutsche Bank can’t fend off attempts to poach talented employees, Mark Fedorcik, the co-head the investment bank’s operations in the Americas, said in an interview on Thursday.
“We will defend them to make it almost impossible for them to leave,” he said.
Last year, the U.S. arm surprised observers with its ability to recruit. Even this year, it’s still planning to announce some strategic hires, Fedorcik said. Attrition is now slower than 12 months ago and most of its investment banking groups have expanded their share of the region’s fee pool, he said. The move to a Midtown tower, with a commanding view of Central Park, “gives us a fresh look,” he added.
For clients watching from the outside, even incremental changes can be jarring. After all, companies and hedge funds want to know who they’re going to be dealing with. If they lose confidence that Deutsche Bank will be available to handle their business, they’ll move.
One London-based hedge fund manager, annoyed with the bank’s pullback in the Americas, said he will shift dealings elsewhere. Unclear is whether the bank will miss him. After all, it’s planning to curtail work with funds whose business hasn’t proven lucrative.
Altogether, the new strategy is a stunning turnabout from less than a decade ago, when Anshu Jain was climbing to the top of Deutsche Bank as an embodiment of swaggering, Anglo-American-style financial capitalism. Back then, an executive atop the Americas equities division, Barry Bausano, boasted to Bloomberg Markets magazine that Deutsche Bank was on a roll.
Jain and his British successor, John Cryan, have since departed after their halting attempts to improve profitability. Underscoring the issues at the investment bank, trading revenue in the first quarter dropped 17 percent from a year earlier, compared with a 12 percent increase at U.S. rivals. Sewing has said the bank must now “act decisively.”
Rivals insist that spells opportunity. At the Milken conference, a sort of Davos-like gathering hosted by Michael Milken, several banking executives casually compared notes on whom they should try to pick off at Deutsche Bank. Others openly marveled at how long some of the bank’s U.S. leadership has held on. All spoke on the condition they not be named.
One of those leaders is Tom Patrick, the head of Deutsche Bank’s U.S. arm. He rose to global head of equities in 2015 before handing off those duties in November to a new hire, Goldman Sachs Group Inc. veteran Peter Selman. Patrick’s name has appeared on staff memos announcing recent changes, a sign he remains in good standing and is helping shape what happens.
That’s despite his at-times contentious relationship with Garth Ritchie, the global head of the investment bank, according to two senior executives with direct knowledge of their relationship. Ritchie built his career in cash equities and was frustrated to see it slip after he handed it off in 2015, the people said.
To be sure, Deutsche Bank’s struggle to overhaul its business was dealt a blow in 2016, when news leaked that the U.S. Justice Department wanted the German lender to pay $14 billion to settle an investigation into residential mortgage-backed securities.
That spooked clients, who worried about its strength as a counterparty. The firm suffered its worst hemorrhage of liquidity since the 2008 financial crisis, with private banks and money managers at one point pulling $10 billion in a single day. The company settled the probe months later for $7.2 billion and raised capital.
Bausano, in charge of managing Deutsche Bank’s relationships with hedge funds, helped persuade clients to stay. This week, in a memo, the firm praised his work on “forging strong relationships” -- and announced he’ll soon be leaving.
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