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Three Reasons Deutsche Bank Didn’t Exit Wall Street Earlier: DealBook Briefing

Credit...Daniel Roland/Agence France-Presse — Getty Images

Good Thursday. Here’s what we’re watching:

• Deutsche Bank is finally, and drastically, shrinking itself.

• Facebook can afford to clean up its act.

• Is the problem with I.P.O.s a ‘middle-market tax’?

• On today’s earnings calendar: Amazon, Microsoft, PepsiCo and Lazard.

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One of the mysteries of modern banking is why Deutsche Bank’s retreat from Wall Street, announced Thursday, took so long.

Since the financial crisis a decade ago, the German institution’s giant investment banking operations have lagged well behind those of its rivals. And Deutsche Bank’s problems had relevance well beyond the trading desks of Wall Street; its difficulties have at times pumped uncertainty into the global financial system. Deutsche Bank’s post-crisis behavior stands in contrast to that of other European investment banks that had also become risky and bloated before the 2008 meltdown. Switzerland’s Credit Suisse and UBS made hard decisions several years ago that helped them adapt to new realities. But Deutsche Bank wavered and delayed. And since this probably won’t be the last time that a too-big-to-fail bank takes too long to fix itself, it’s worth asking why Deutsche Bank dragged its feet. Some reasons follow:

Hubris. Large banks that did rebound after the crisis were able to point to actions that allowed them to get ahead of challenges they faced. Perhaps the largest challenge was raising large amounts of capital to placate creditors and regulators. But compare Deutsche Bank’s capital raising to that of JPMorgan Chase. In 2011, Deutsche Bank’s tangible equity capital (common equity minus goodwill) was equivalent to 3.3 percent of its assets (counted in the same fashion as in the United States), whereas JPMorgan’s was at 5.7 percent. Notably, Deutsche Bank, by the end of 2017, still had not raised that ratio to JPMorgan’s 2011 level. JPMorgan’s ratio was 7.2 percent at the end of last year.

When United States regulators proposed that large foreign banks maintain higher capital at their U.S. subsidiaries, Deutsche, which has a big presence in the United States, resisted and moved to avoid the requirements. But the United States regulators mostly held firm, which may be one reason Deutsche is finally retrenching. If Deutsche Bank’s German regulator had been tougher, the bank may have done more, earlier, to shore up its balance sheet. After all, it was stiff pressure from the Swiss central bank that helped prompt the overhauls at UBS and Credit Suisse.

Fear. Deutsche Bank’s leaders may have worried that scaling back its investment bank would cause too much financial pain. Those operations last year provided 54 percent of the bank’s overall revenue, so paring back the investment bank could have a big impact on the top line. And Deutsche Bank’s investment bank hardly has the earnings to absorb the costs of a deep restructuring. In the first quarter of this year, a good period for Wall Street as a whole, Deutsche’s investment bank posted a paltry return on equity of 1.4 percent. The potential cost of a far-reaching restructuring is also hard to assess. Deutsche Bank may be entangled in uneconomic trades that would cost large sums to exit. Fears of toxic exposures were stoked earlier this month, when it was reported that the European Central Bank had asked Deutsche Bank to estimate the costs of winding down its trading operations.

Confusion. Deutsche Bank’s leadership structure may have allowed big problems – like serious issues with I.T. – to fester and made it harder for leaders to take decisive actions. The bank had two C.E.O.s for a time. And any C.E.O. of Deutsche Bank has to work with two boards, one of which is a supervisory board that can have significant sway over strategy. A big question still hanging over Deutsche Bank is whether Paul Achleitner, the chairman of Deutsche Bank’s supervisory board, is the right person to oversee the institution’s next steps.

- Peter Eavis

Deutsche Bank’s decision to end its Wall Street ambitions should benefit its American rivals.

The German lender said on Thursday that it was scaling back operations such as trading and providing services to hedge funds. According to a note from Keefe, Bruyette & Woods, Deutsche Bank’s decision to shrink its investment banking business should “help industry pricing and provide a revenue opportunity” for United States banks.

Deutsche Bank’s scale of trading

Last year Deutsche Bank had a 7.7 percent share of the trading in bonds, currencies and commodities, and a 5.1 percent share of stock trading.

Deutsche Bank reported €4.4 billion in revenue from fixed-income trading last year and another €2.1 billion from equity trading. Of the combined €6.5 billion in revenue it generated, 40 percent came from the United States, according to a note from Keefe, Bruyette & Woods.

Which banks stand to benefit

JPMorgan, Bank of America and Citigroup should get a lift from Deutsche Bank’s pull back from fixed-income trading. The three banks’ market share of fixed-income trading is nearly 50 percent.

For stock trading, Goldman Sachs, Morgan Stanley and JPMorgan have about 45 percent of the market.

Amazon’s profit more than doubled during the first quarter, while Microsoft’s earnings jumped 35 percent. A driver for both companies was their cloud-computing businesses.

Amazon’s numbers

• The e-commerce giant reported a profit of $1.6 billion, up from $724 million a year ago.

• Earnings per share came in at $3.27. Analysts expected $1.26 per share, according to Thomson Reuters.

• Revenue jumped 43 percent to $51 billion, beating analysts’ expectations of $49.78 billion.

• Operating income increased 92 percent to $1.9 billion in the first quarter.

• Sales for Amazon Web Services, its cloud-computing business, increased 49 percent to $5.4 billion.

Critic’s corner

Jennifer Saba of Breakingviews writes that Amazon is “getting bigger, but it’s getting heavier too.”

“Sales have more than doubled in five years, but it’s taking more fixed assets to get there. Amazon now uses property and such with less efficiency than Walmart.”

Microsoft’s numbers

• The software giant posted a profit of $7.42 billion, up from $5.49 billion a year ago.

• Earnings per share came in at 95 cents. Analysts expected 85 cents per share.

• Revenue rose 16 percent to $26.82 billion, beating expectations of $25.77 billion.

• Operating income rose 23 percent to $8.3 billion.

• Revenue at Azure, Microsoft’s could-computing business, surged 93 percent.

Shares of Amazon climbed 7 percent after hours, while Microsoft’s stock rose 2.1 percent.

Critics’ corner

Rob Cyran of Breakingviews writes of Microsoft: “Its secret is dullness and durability: the predictability of Microsoft’s earnings under boss Satya Nadella has helped the firm’s stock outperform Apple, Alphabet and Facebook over the past five years.”

Facebook shares surged more than 9 percent Thursday after it handily beat expectations on both the top and bottom lines.

The stock is trading around $174, its highest level since the Cambridge Analytica scandal erupted in mid-March. Shares of Facebook fell nearly 19 percent in the weeks after The New York Times reported that the political consulting firm had acquired the private Facebook data of tens of millions of users — the largest known leak in Facebook history.

Since hitting an intraday low of $150.80 on March 28, the stock has climbed 15 percent and reclaimed more than $60 billion in market value.

Ross Sandler, an analyst at Barclays, writes:

“We don’t think 1Q marks the “all clear” for FB shares by any means, but given the drubbing over the past two months, we think it may start an overdue stabilization period (next week’s f8 should also help move the conversation back to innovation to some degree). Stepping back, FB’s valuation is attractive vs. its peers, and while we fully expect more tape-bombs in 2018 we think patient investors will be rewarded at current levels when sentiment eventually improves.”

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Credit...Jeff Chiu/Associated Press

The tech giant has promised to spend a lot of money on improving its operations after the Cambridge Analytica scandal. It’s not yet clear quite how much — Mark Zuckerberg told analysts yesterday that the company was still working on making its products “good for people and good for society.” And his chief technology officer, Mike Schroepfer, told U.K. lawmakers this morning that Facebook would vet British political ads next year.

What’s now apparent: These controversies are yet to hurt the bottom line.

Facebook’s first-quarter earnings featured a 63 percent jump in profit and a 49 percent rise in revenue. And roughly 70 million new monthly active users.

Peter Eavis’s take: If Facebook wants to spend more on protecting its community, it can: Its operating earnings are equivalent to 46 percent of its revenue. But its expense numbers haven’t provided clear evidence that the company is going the extra mile yet.

The key assessment, from the Pivotal analyst Brian Wieser:

“All the data privacy issues, the congressional hearings, none of that will get as much scrutiny from investors as the bottom line.”

Elsewhere in tech: Twitter did well in the first quarter — but where is its growth coming from? Why changing tech companies may be a job for tech employees. Amazon’s HQ2 is likely to push up its neighbors’ rents. YouTube Kids has new parental controls. Nasdaq is open to future cryptocurrency trading. What happened as Mt. Gox fell.

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Credit...Graham Walzer for The New York Times

The chipmaker reported results Wednesday that topped Wall Street’s expectations. The conference call that followed provided analysts an opportunity to ask about where Qualcomm’s acquisition of NXP stands. The deal is awaiting approval from Chinese regulators, but growing trade tension between China and the United States has increasingly put the deal in doubt.

Here is what Steve Mollenkopf, Qualcomm’s chief executive, said on the call:

“We continue to work closely with China. The environment is obviously quite difficult from a geopolitical point of view, at least right now. However, we expect to ultimately receive approval. And I’ll just remind folks that we have 8 of 9 jurisdictions that have already ruled on it. So although we — we remain committed to it. And we think it’s going to get done. However, if it does not get done, as you mentioned, we think we have the ability to move very rapidly on a buyback as we communicated earlier in the January time frame. I’ll just remind everyone that we did a 90-day extension to the merger agreement. And we’re going to work very hard to get that done. And if it doesn’t get done, we’re going to move on to another approach. So hopefully, that answers the question.”

A bit later in the call Mr. Mollenkopf added:

“With respect to MOFCOM and remedies, our evaluation of the environment is such that really, I think the issue is probably more related to the higher-level discussions between the countries as opposed to any individual issue related to MOFCOM. Of course, we continue to work with the regulators and work through any issues that pop up. But I think the environmental issues between the countries are probably more the situation today than anything else. But obviously, we work closely with the regulator.”

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Credit...AP Photo/Andrew Harnik

It’s not just regulations like Sarbanes-Oxley that put smaller companies off public listings, argues Rob Jackson, a Democratic S.E.C. commissioner — it’s the fact that they pay on average 7 percent of proceeds raised in their offerings, way more than bigger clients.

From Mr. Jackson’s speech in Cleveland yesterday:

“With the deck stacked against them, it’s no wonder that middle-market I.P.O.s have been on a steady decline. And this has had real effects across our economy, which is now dominated by fewer, and larger, public companies than ever before.”

He suggests the S.E.C. should make underwriters disclose more about the costs of going public, including companies’ potential losses from underpricing, and that bankers should do more to explain why they’re worth their fees.

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From left: the players DeMaurice Smith and Eric Reid; Bob McNair, owner of the Houston Texans; and Roger Goodell, the N.F.L. commissioner.Credit...Associated Press

One thing that emerged a summit between owners and players last fall, according to an audio recording obtained by the NYT, was the league’s worry about President Trump continuing to attack the N.F.L. for the protests — and denting its roughly $13 billion in revenue.

What Jeffrey Lurie, the owner of the Philadelphia Eagles, said, according to the NYT:

“We’ve got to be careful not to be baited by Trump or whomever else.”

Bob Kraft of the New England Patriots, a friend of Mr. Trump, said:

“The problem we have is, we have a president who will use that as fodder to do his mission that I don’t feel is in the best interests of America.”

• Several Supreme Court justices appeared skeptical about overturning President Trump’s immigration ban. How the White House got better at these cases.

• The head of the Office of the Comptroller of Currency, Joseph Otting, bought financial stocks until he took up the position in November. And Mick Mulvaney wants to end the C.F.P.B.’s public database of consumer complaints.

Emmanuel Macron criticized the Trump administration’s planned metals tariffs, saying, “Commercial war is not the proper answer.” Congress remains a hurdle in revising Nafta.

• Scott Pruitt plans to spread blame for his embarrassments at the E.P.A. But is he losing the White House?

• Michael Cohen plans to plead the Fifth in Stormy Daniels’s lawsuit. Jeff Sessions wouldn’t say whether he has recused himself from the Cohen investigation.

• The chairman of the Senate Banking Committee, Mike Crapo, criticized Citigroup and Bank of America for moving to limit gun sales. (Bloomberg)

• Under the new tax code, are REITs better off not being REITs? (Bloomberg)

• The Justice Department is reportedly investigating whether Huawei violated U.S. sanctions on Iran. (WSJ)

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Credit...Armando Babani/EPA, via Shutterstock

Under its new C.E.O., Christian Sewing, the German lender plans to cut back U.S. trading and its U.S. and Asia corporate finance teams, and look at slimming down its global equities business. That portends big cuts to its staff of 97,130.

“There is no time to waste,” Mr. Sewing told analysts this morning, after Deutsche reported a 79 percent drop in first-quarter earnings. “The call to action is simple: Focus, grow revenues and significantly reduce costs.”

Elsewhere in financial services: A former UBS trader, Andre Flotron, was acquitted of market manipulation. The F.T.C. has charged Lending Club with deceiving customers about fees. A coordinated cyberattack hit seven of the U.K.’s biggest banks last year. The activist investor Edward Bramson is expected to meet with Barclays’ C.E.O. in coming weeks. What Henry Kravis and Bill Ackman have to say about philanthropy.

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Randall Stephenson, left, leaving a news conference about the AT&T and Time Warner merger.Credit...Amir Levy/Getty Images

For the same reason its sales and earnings missed analyst estimates: It’s seeing fewer higher-paying subscribers for traditional DirecTV services and more cord-cutters. Tablet and smartwatch subscriptions were up, but phone ones were down. Its archrival, Verizon, has also lost phone subscribers, but has done better job at finding new ones elsewhere.

More what Time Warner and its brands — HBO, Turner, Warner Brothers — offer AT&T, from Tara Lachapelle of Gadfly:

There’s no question that it will help make sense of Randall Stephenson’s expansion of AT&T into the pay-TV market and improve AT&T’s positioning and value proposition.

More on 21st Century Fox: Meet the advisers who benefit if Comcast or Fox buy Sky. Liam Proud of Breakingviews thinks that Sky shareholders shouldn’t bet on a bidding war. Chris Hughes of Gadfly thinks Comcast should pay more. Will Comcast try to break up Disney’s bid for Fox assets? And why has TCI reportedly built up a 4 percent stake in Fox?

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Credit...Andrew White for The New York Times

• Peter Thiel won’t bid for Gawker after all. (WSJ)

• Could Bain Capital’s bid for Toshiba’s memory-chip unit become a casualty of a U.S.-China trade war? (FT)

• G.E. reportedly spurned interest from Danaher in its life-sciences unit. (WSJ)

• Saudi Arabia hopes to sell $10 billion of state assets by 2020. (FT)

• Bain Capital and Advent International are reportedly potential bidders for Eli Lilly’s animal-health unit. (Bloomberg)

• Hearst has bought a stake in Gear Patrol, a publisher with a flair for e-commerce. (WSJ)

• Elliott Management’s U.K. arm agreed to buy the bookseller Waterstones. (FT)

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Credit...Ronald Wittek/European Pressphoto Agency

• TPG has hired John Kerry, the former secretary of state, as a senior adviser to its Rise fund. (Bloomberg)

• BP has appointed Helge Lund, the former C.E.O. of BG Group and Statoil, as chairman. (FT)

We’ll let Kanye West take it away:

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• Ford will stop making sedans for North America. (NYT)

• Foreign executives at the Beijing auto show put limited hopes in promises to open up the industry. (NYT)

• Boeing aims to have a new facility ready in China by the end of the year. (WSJ)

• What analysts will be listening for when Mario Draghi speaks today. (NYT)

• Venezuela’s state oil company owes ConocoPhillips over $2 billion, an international tribunal ruled. (NYT)

• An interview with Ferrari’s biographer: “In Italy, there was the pope and then there was Enzo.” (NYT)

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