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Could Credit Suisse's new writedown have repercussions?

Morning Coffee: The nebulous dangers of the $450m loss at Credit Suisse. Deutsche’s not-so-daring work from home plan

The stock market obviously doesn’t think that the writedown taken by Credit Suisse on their investment in York Capital Management  was such bad news – the share price was actually up by nearly 4% yesterday, in line with Deutsche and GS, and somewhat better than UBS.  It’s not hard to see why – the effect on capital was negligible and there’s no impact on the dividend.  It’s also not new news; it’s been pretty clear since 2016 that outside the Asian funds, York has had performance and net flow problems. 

And crucially, it doesn’t reflect badly on anyone currently in top management.  The only current executive board member who was there in 2010 is general counsel Romeo Cerutti (David Mathers was appointed as CFO two weeks after the deal closed).  That means there’s less likelihood of a damaging internal blame exercise. 

So it’s an embarrassment rather than a wound – all it really means is that Thomas Gottstein is going to have yet another annoyance at the next results presentation.  Nonetheless, it can’t be ignored that the accounts will record a loss of nearly half a billion dollars, and CS employees might do well to think about the circumstances of the writedown, what they tell us about the state of the world and how they might affect people’s thinking going forward.

The key thing it shows is that nothing lasts forever, and that when financial industry franchises go into decline, there’s not much left.  Ten years ago, CS paid $425m plus an earnout for its stake, and although it will have had some share of profits in the meantime, the $450m write-off looks like it would be consistent with assuming that the business is now not worth very much at all.  There may still be some upside from the planned Asian spin-off to be run by Masa Yamaguchi, and the York name will continue to run internal capital and manage private equity and other long-dated assets, but the tone of the press release seems pretty much “goodbye to all that”.

Although the precise background circumstances aren’t completely clear, it looks very much as if broadly defined “people issues” played a part.  Like almost every hedge fund with a big name founder, York has had “succession issues”, with Jamie Dinan alternately “ceding some responsibility” and “getting more involved in running the firm” over the last few years.  It’s also had layoffs, partly due to shrinking assets under management.  Then on Monday, they announced that co-CIO Christophe Aurand would be leaving.  In general, hedge fund clients can sometimes be induced to tolerate personnel turnover, or periods of underperformance, but not both at once. 

All of which certainly suggests that it might be a while before Credit Suisse feels like investing in hedge fund manager companies again.  But might the lessons learned be applicable to the rest of the business?  York Capital has happened in public, and it was a big initial investment.  But the general phenomenon of pouring money into a profitable seeming franchise, then seeing the returns lose their shine, followed by a “significant change in strategy” that leaves all the value gone … this happens over and over again in the investment banking industry.  As CS goes into the post-pandemic period, it’s perhaps a bit unnerving that the new CEO will have been given such a year-end reminder of the dangers of markets businesses and an industry where the key assets leave the building every evening.

Or, indeed, where the key assets never came into the building in the first place.  Separately, Bloomberg is reporting that Deutsche Bank is about to announce a long term remote working policy, and that the standard (subject to regulatory requirements and depending on the role) is going to be that Deutsche employees can expect to spend two days a week at home.  The company has confirmed that it is “working on a hybrid model”, but not the specific number and emphasizes that no final decision has been made.

The story has the ring of truth, however; back in September, U.S. employees were told that they wouldn’t have to return to offices until after the move from Wall Street to Columbus Circle.  Since that would imply large scale homeworking until July 2021, it’s not much of a stretch to believe that Deutsche has already made the sort of infrastructure investments which would support it; all that’s really left to decide is whether they want to. 

Meanwhile …

Seemingly as a regulatory Brexit hedge, Goldman Sachs is setting up SIGMA X Europe, a version of its dark pool equity trading platform based in Paris.  It’s not clear how many job moves this will imply, though.  On the one hand, European regulators have been clear that they expect a real presence for any new operation rather than a brass plate run remotely.  On the other, given that it will mainly link up to Goldman’s existing architecture, the pool could run with a relatively small team supporting it – only six people in London mention SIGMA-X on their LinkedIn profiles right now.  Either way, Elizabeth Martin, Goldman’s co-head of electronic trading, reckons that London will lose all its volume in EU stocks, which feels significant for the long term. (Bloomberg)

New UK rules on business travel might stipulate that short visits to the London office were possible for senior investment bankers, as long as there was no socialising at all.  So December review season without the awkward dinners and pub trips – possibly the best news head office has heard all year. (FT)

Always an interesting interview, Bilal Hafeez talks about COVID, the future and his own unique approach to research marketing. (Seeking Alpha)

One consequence of working from home and not travelling for Thanksgiving is that Black Friday is going to be more like a normal work day for US traders, particularly given huge market volume. (Bloomberg)

Obesity discrimination is still rife in the UK, but only for women – obese men actually earn a small salary premium (People Management)

Facebookers appear to be suffering the same kinds of survivor guilt after the 2020 election which bankers experienced after the financial crisis. (New York Times)

AUTHORDaniel Davies Insider Comment
  • An
    26 November 2020

    I wonder if the People Management survey would have been published if it had shown that discrimination against obese men was more common.

  • To
    25 November 2020

    "Obesity discrimination"? Meaning those who become so excessively overweight they face chronic and long-term health problems?

    Why would anyone pretend to ignore this? And why America listen to ones trying to normalize the biggest source of health problem, which is completely preventable??

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