Where egos dare

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The last few months saw two major investment banks, Deutsche Bank and my erstwhile employer Nomura, faced with increasing difficulties, and actively engaging in paring much of their businesses amid mounting losses.

In both cases, this was likely a case where these firms tried to grow too rapidly, in a bid to become all things to all people, and engaged across the entire spectrum of investment banking activities – on a global basis to boot.

Deutsche Bank just called off a possible merger with Commerzbank – a hastily and likely political solution to its long-term woes – while Nomura, yet again,  took the meat cleaver/katana to a significant portion of its international activities.

How did it all end there?

Deutsche Bank was once known for its aggressive style, as well as for using its balance sheet to win lucrative advisory mandates. Its bankers could unearth fat fee-paying business fees across the four quarters of the world, and turn complex trades into mergers, acquisitions, ECM deals and wealth management mandates.

But there’s a silver lining to all of this: a costly infrastructure that soon takes its toll on the bottom line, coupled with the losses which high risk-taking business inevitably translates into when one regularly engages in bought deals.

International investment banking is a fairly recent endeavour at Deutsche Bank and can be traced to the mid-1990s, when a number of S.G.Warburg luminaries and high fliers defected to what was then Deutsche Morgan Grenfell, to build from scratch a global equity capital markets platform.

Conversely, Nomura, a major player in the 1980s and 1990s has since been struggling to beef up what next reverted to a largely domestic behemoth. Not content with milking the savings of Japanese housewives, its big opportunity came when Lehman Brothers collapsed, and it managed to snap for a song both the European and Asian operations of that failed American bank (with the prized US business going to Barclays).

Well, almost for a song: whoever thought that guaranteeing two years of expensive yearly bonuses to Lehman’s former staff was a brilliant idea and would ensure loyalty was gravely mistaken. As it turned out, the Lehman franchise largely failed to deliver, and catapult Nomura back to the premier league it so badly dreamed to rejoin.

Sadly, Deutsche Bank and Nomura are hardly the only members of that no joy, no luck club.

The Royal Bank of Scotland’s path to stardom violently hit a brick wall after its ill-fated (and, above all, ill-thought) acquisition of ABN Amro, while Barings’ once venerable name remains forever in the doldrums after the Nick Leeson saga, and ensuing purchase for £1 by ING (with likely very few of that firm’s original masters of the universe now remaining with Macquarie).

In Lisa Endlich’s biography of Goldman Sachs, she recalls how one of its partners systematically crossed one by one with a red pen, on an unframed tombstone affixed to one of his office walls, the names of the firms that underwrote the IPO of the Ford Motor Company in 1956 – and subsequently disappeared. A few decades later, the poster was little more than a sea of red.

Ouch! An another one bites the dust!

The irony is that investment banks charge their clients an arm and a leg for sophisticated advice provided in connection with what are often extremely complex transactions, yet often seem to head for the abyss themselves in record time, after making major corporate decisions that affect their own strategic direction.

And, more often than not, this comes down to egos: reinventing the wheel shows, if anything, that you’re not standing still.

Establishing a major platform one can be remembered for ever so often takes precedence over calmly analysing, with both detachment and discernment, all the ins and outs of strategic corporate decisions.

And so, sadly, investment banking CEOs fall prey to nasty unconscious biases, alarmingly more often than their peers in other industries (with the possible exception, though, of Mr Carlos Ghosn).

As my former ECM colleague-turned author David Charters (who also coined the title of this column) once famously wrote about corporate financiers: the ego has landed.