Tuesday, 9 June 2015

Zen and the art of survival. How to keep your head at Deutsche Bank when the axe falls.

How do you survive a revolution? Keep your head down and say nothing? Make yourself the center of things and be indispensable to the incoming regime? Perhaps pile in with the mob and storm the Bastille in the hope that you're going to end up on the right side of things? Essentially when the first shot gets fired, it's like Darwin's theory of evolution on speed, acid and whatever else you can loot from the pharmacy. There's only one thing for sure; Mr. Kipling said it best:

"If you can keep your head when all about you   
    Are losing theirs and blaming it on you,   
If you can trust yourself when all men doubt you,
    But make allowance for their doubting too;   
If you can wait and not be tired by waiting,
    Or being lied about, don’t deal in lies,
Or being hated, don’t give way to hating,
    And yet don’t look too good, nor talk too wise:"
                                                   (If— Rudyard Kipling)

If you woke up as a senior manager at Deutsche Bank on Monday morning, you were disconcertedly thrust into the maelstrom that was Anshu Jain and his Co-CEO J├╝rgen Fitschen's decisions to fall on their respective swords. It was like Sepp Blatter's decision to resign after carrying the vote at the FIFA AGM. Sometimes battles are won while wars are being lost. Jain and Fitschen's failure to get the full backing of the shareholders at the DB AGM was a battle won (61% to 39%) that was at the same time a war lost. So what now?

Assuming you're an MD at DB you probably spent Monday morning being bombarded by insecure underlings asking questions you can't possibly answer. I'd say a fair proportion of senior managers at DB didn't even know that incoming CEO John Cryan was already on the board, let alone that he stepped up at UBS when others were failing and brought down the axe on the notion of universal banking at the Swiss giant. I don't know Cryan personally, but I've been on the end of the phone to him a couple of times. My only memory was of someone in a hurry who expected me to have the numbers. He wasn't rude, just a bit brusque.

With all this in mind, I wanted to pen a few words on what to expect and how to possibly survive and prosper the brave new world.

1. Know everything about your business

  "Know then thyself, presume not God to scan;
The proper study of mankind is man."
                                   (An Essay on Man: Epistle II - Alexander Pope)

It may sound simplistic, but within the investment banking world you'd be surprised how some managers are in perpetual crisis mode; managing from one mandate to another. Revolutions are dangerous because the bullets start coming from all directions. You're not going to get time to solve each problem or take advantage of each opportunity individually. The only survival plan is to know your business inside out and how it fits within the bank.

Firstly you have to know about Cryan and what he'll be looking for from his team. Unfortunately, he's been on the board of DB, meaning he's all over the business. He has probably already had a plan pre-approved. That's how he got the job; it wasn't because no one else put up their hand.  The board expects the plan to go into action on day one. Therefore, time is not on your side.

a) Understand the metrics of you business.

It's more than just net profit. Do you know your cost/income ratio? Read through the recent annual reports of your bank and it's competitors. What are the hot metrics? Could you produce the numbers at a moments notice? If the bank tried to sell your business area what would it be worth?

Even if your business is underperforming a fresh look at the numbers might throw up obvious opportunities. Too many managers just go for the straight 10% cut in headcount and hope the consultants will see them as constructive and proactive. Think more radically and be prepared to shrink your business to grow. Ask yourself what would your business looks like with 50% less headcount and capacity cuts across the board. Would you prefer to run a business with $500m in revenue and a RoE of 4% or one that brings in $200m with a 20% return? Either way you need to know the numbers to be able to come up with an achievable set of goals when examined.

b) Chose your team wisely and early.

A plan is only so good as the execution. The team needs to be small and focused. The bigger you make the core, the harder it will be to make the changes needed to survive and hopefully prosper. The underachievers need to go. Just because X or Y has attached themselves to a huge line of revenue does not mean that they are untouchable. I once heard a broker tell the head of sales at a bank that he knew the client didn't want to do the deal because he was the fund manager's child's godfather. That is not a reason in investment banking. In fact, that's a reason for summary execution, as it shows that the member of staff in question would be forever unable to find out the real reason for the failure to close.

Draw up a plan and have specific tasks allocated to each headcount. Do not be afraid to be the most radical person in the room. Take to your client or product lists with a guillotine. The only thing you have to watch is where your team is acting in support of another. For example, the biggest fixed income client for the bank may be proportionally one of the least profitable from an equities point of view. In that case, you have to see if you can improve your returns on this revenue without increasing costs or have the existing costs you incur "up streamed" to the business head unit. This is hard to do and will mark you as being a non-team player. The way around this is to make the numbers very clear and allocate either lower cost resources to the client or have someone higher up take it out of your hands. The cheaper up and coming AD might be a better solution rather than sticking with a more senior headcount. Be prepared to defend your analysis and plan every step of the way.

c) Attend every meeting no matter when, where or whatever time.

Absence is an excuse for others to fill in the blanks. If you've followed my advice and knew your business inside and out you don't want others speaking for you. Any shifts regarding the requirements of the CEO and his chosen team will not be sent around in emails for all and sundry to leak and eviscerate. There are going to be times when a nuanced nod or turn of phrase will be better than hours spent going over plans with the inevitable McKinsey type strapped to your shoulder. At these times, you'll also get the chance to change the debate or do some land grabbing. The constructive use of such gems as "why don't we just cover that product with the London/NY/Tokyo team, instead of duplicating the headcount" can often be the start of something more positive. The defender of the status quo better know what they're saying because ipso facto that approach probably hasn't worked up until now.

2. The Big Picture

Do not go gentle into that good night,
Old age should burn and rave at close of day;
Rage, rage against the dying of the light.
                                             (Do Not Go Gentle Into That Good Night - Dylan Thomas)

It's not all doom and gloom. The bank doesn't want to close down; it just wants better returns. No institution with the revenues of a Deutsche Bank is going to go down without a fight. The new CEO has certain levers to pull, and you need to know the order of action.

a) Keep your friends close and your enemies closer.

Read everything you can on the CEO and his team. In Mr. Cryan's case, you'll want to know how he succeeded in turning UBS around. Your first hint is that he was the CFO. That means he wasn't dealing with soft issues, such as culture, marketing or work-life balance. He was dealing with the tangible numbers that impact the business such as capitalization and risk. Everything you do and say has to have cold hard numbers at the forefront.

b) Valuation, valuation, valuation . . . know the focus.

"The economy, stupid." 
                               (James Carville to Bill Clinton)

Currently, DB trades at roughly half of its net asset value. This is a joke and an indictment of the outgoing management. This one metric says that the shareholders don't trust management to realize the value the bank has assigned to assets. There's going to be assets or businesses divested or written down in value. This is without a doubt the biggest opportunity in the restructure. Know what is on the block and contribute accordingly. When others shy, away from the toxic be prepared to take on the impossible. The only caution to this is to have an unambiguous mandate to take action. Remember that the mere fact that some of these assets are trading at a steep discount probably means the odds are on your side that you can turn things around and release value. This might be a one-off situation, but every time you report a revaluation you'll be thanked and set yourself up for success in the future.

c) Risk and the art of survival

"Risk comes from not knowing what you're doing."
                                                                                                          (Warren Buffett)

I'm almost never surprised by bankers who don't understand the way risk capital is allocated. DB and its peers spend lots of time and money producing exquisite risk reports. These reports are available to one and all online . . . gratis.

Ever seen this?
It's your fault if you haven't read them.

A broker tried to tell me over a coffee last week that the equity derivatives market in Australia was being dominated by UBS because they were warehousing the risk. When I challenged him as to where he got this fact, he came back with the usual "gossipy" hearsay quotes. When I pointed to the VaR numbers that the bank published he admitted he'd never seen them. I didn't stomp on him too hard, but if you're at DB and you start making these type of statements to the new management team you'll be in trouble. Here's what to do:

i) Go through the VaR numbers and note the changes over time
ii) Understand the capital allocation process required to support those numbers
iii) Read the Basel committee reports regarding risk as it pertains to DB and the other global banks
iv) What is your current capital adequacy position

Once you have these facts, you can participate in high-level meetings with something more than generalisations.

3. Plan B

It's very likely that things will move quicker than you expected, and you need to know when to stand your ground or retreat.

"It's a very sobering feeling to be up in space and realize that one's safety factor was determined by the lowest bidder on a government contract."
                                                                                                                                         (Alan Shepard, Astronaut)

Around the time of the GFC, a friend of mine was headhunted to Barclays. Happy days, big salary package, a department to run on his terms. Sweet. The bar was low because the Barclays business had been underperforming in his sector. Unfortunately, his feet hardly had a chance to touch the ground. First of all his bank got into a dispute with a headhunter who said he'd facilitated the deal. His salary details got leaked as the dispute escalated. Next Barclays bought a chunk of the old Lehman Bros. business and with it a whole team of managers looking to stamp their authority on the business. No one at Lehman's ever lacked hubris and humility even in the face of total abject defeat was in short supply. Given my friend was probably earning more than his new ex-Lehman's boss he didn't stand a chance. He was a big target, and the Lehman gang didn't like outsiders. He got metaphorically shot.

All this leads me to the sobering fact that you need a "Plan B". It might not be an outsider who causes your demise, but it could be anyone. Even the best brokers, traders or corporate financiers will not be indispensable in a revolution. Look for opportunities to exit with "an edge." A good example might be with an underperforming asset or business. If you can see the sinking ship to port (or in this case asset), it might just be possible to salvage something tangible.  Always consider jumping for longevity. Take a smaller pay packet and survive in a sector you know and enjoy rather than being set adrift at the last moment into the unknown.

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The main thing is to remain positive. Constant gloom will kill your profile and your plans in the eyes of the new management. Don't be afraid to engage. Being a small target might seem like the best tactic, but insignificance is a sure way to oblivion.

Ciao