Morning Coffee: UBS's layoffs come at an ominous time, and Lazard says the future of M&A is quant

After a few weeks of rumours, the redundancies at UBS have begun.  A relatively small number of senior staff were let go in the equities business in London yesterday.  This is not quite the “hundreds” of job losses that were being talked about at the start of September … yet.  If the rumours at the time were correct, the equities management will be thinned out in preparation to be merged with FX, rates and credit trading to form a single “Global Markets” business unit, with debt and equity capital markets combined on the banking side and similar loss of senior headcount (and co-headcount).  That's what's supposed to happen. And the timing of the announcement fits into a pattern which makes it seem quite likely that those rumours will turn out to be right.

Nothing has been confirmed by the bank.  But the fact that the first layoffs have happened in this particular week is not a good sign.  When banks wait until the start of October to make layoffs, it’s usually because they’ve delayed the decision from the last weeks of September.  They do this so that that the severance costs land in the fourth quarter rather than the third, and they do that because in a bad year, investors tend to write off the fourth quarter anyway and look to the future, while Q3 is often taken as the “run rate” of what a franchise can actually deliver.  That’s the orthodox philosophy of investor relations anyway – there’s not really much evidence it works, but whether it does or not, the point is that it’s a decision you only have to make if the level of job losses you’re targeting is big enough for the redundancy payments to make a difference to the whole company’s income statement.

That means that if the rumours are true and the job cuts have been delayed to avoid stinking up the third quarter, then there will be more than a few of them. It also suggests there will be plenty of people made redundant who have accrued lots of deferred compensation (which is usually accelerated when people are terminated without fault, and which forms the lion’s share of the P&L effect of a big downsize.)

Even more ominously, though, UBS is hardly unique in the situation of its investment bank.  The last set of quarterly results were by no means terrible; not enough to redeem the disastrous first quarter of 2019, but good enough relative to the competition to justify a probable increase in the per capita bonus pool.  The third quarter, though, has been horrible across the Street and with interest rates where they are, wealth management revenues aren’t in a good position to cross-subsidise.  If this was a specific problem at UBS, that would be one thing.  But looking across the U.S. and European investment banking industry, there are pretty few banks where you can say with any confidence that they won’t be considering a similar pruning of the high earners...

A less aggressive sort of contemplation might be underway at Lazard; the M&A market is off its 2018 peak, but after five extremely strong years they are not under immediate pressure to do anything drastic.  What they are doing, however, is thinking about introducing machine learning, big data and the whole quant toolkit into M&A - a part of the industry that’s always been thought of as the ultimate people business; a relationship based franchise that robots can never replicate.

According to CEO Kenneth Jacobs, the idea is partly based on the new field of “activist defense”, which is quite data-driven in terms of analysing shareholder registers and predicting voting behaviour. Jacobs quant M&A conception doesn't stop there though; he says “financial advisory is a prediction business” and if the quant tools can help with valuation and cash flow prediction, they will eventually become as indispensable to the corporate financiers as Excel is today.  It’s unlikely that anyone will invent a machine that can take clients to the opera, but the guy with the dress circle tickets might have to be backed up by the same kind of technology as the quants on the trading floor.

Meanwhile …

There are exclusive clubs, secret WhatsApp groups and power cliques, but then there’s the Investor Advisory Committee on Financial Markets, the small group of the ultra elite of finance who come in to talk to the Fed once a quarter and seem to be able to move the Treasury bond market. (Institutional Investor)

Even when he was in prison, Bernard Madoff was able to charm the journalist sent to interview him.  In general, human beings tend to be much better at getting along with outsiders than almost any other species (FT)

Don’t say things like “I’m not worried about the moral issues here” on a recorded line.  The Wall Street lawyer who was voted “Dealmaker of the Year” in 2018 made that mistake while organising his daughter’s college admission scam, and now he’s “a broken man” asking for leniency from the sentencing judge. (Bloomberg)

Perhaps French and Italian bankers are not moving back to Paris and Milan despite the impending Brexit because they don’t want to be too close to their parents?  That’s among the theories advanced by the Chairman of RBS as to why job moves have so far been smaller than predicted. (Project Syndicate)

Tall people really do earn more (on average and with notable exceptions like Lloyd Blankfein).  Researchers don’t think it’s entirely due to self-confidence and personality – there’s something just about being physically tall (Quartz)

Goldman Sachs’ profits were boosted in Q2 by a gain on its equity investment in Tradeweb.  But it also has significant stakes in Uber and in Avantor and given the performance of those IPOs, Goldman could be looking at a substantial writedown. (Business Insider)

Speaking of Uber, the company is launching an app to link non-driving employees with “gigs”, currently in nonfinancial roles, but who knows for the future? (WSJ)

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