Deutsche Bank’s bloodletting may soon begin

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Deutsche Bank is braced for a huge shake-up

The embattled German lender’s board is expected to vote as soon as Sunday on an extensive turnaround plan that could lead to 20,000 layoffs, close entire businesses and cost nearly $6 billion.

What’s on the table, according to Bloomberg:

• The potential closing of some or all of the bank’s unprofitable non-European equities business.
• 15,000 to 20,000 layoffs, Deutsche Bank’s biggest staff cut in decades.
• The departure of senior executives like Garth Ritchie, the head of its investment bank; Sylvie Matherat, its chief regulatory officer; and James von Moltke, its C.F.O.
• The creation of a “bad bank” to hold tens of billions of euros worth of derivatives.

It’s an unwinding of Deutsche Bank’s ambitions to become the “Goldman Sachs of Europe.” Under a generation of leaders, the German bank expanded into investment banking — only to be undercut by the financial crisis and new regulations that required it to hold much more capital.

But it’s well overdue. The firm’s investment bank alone has 38,300 employees, the same number as all of Goldman Sachs, according to the JPMorgan Chase analyst Kian Abouhossein. And the non-European equities business reportedly loses 600 million euros, or $676 million, a year.

Whether the turnaround will succeed is an open question. An unnamed regulator told the FT that the plan “is the final bullet” that could save the lender. But some analysts aren’t sure that the businesses that would be left are profitable enough to sustain the firm.

The danger of America’s trade flip-flops

In the U.S.-China trade negotiations, Beijing has a distinct advantage, Grep Ip of the WSJ argues: It knows what it wants.

• “Though its negotiating priorities change, over the decades its goal has remained the same: moving steadily up the development ladder while remaining a one-party state,” Mr. Ip writes.
• Every decision China makes is focused on pursuing that goal, which is why it has demanded that the U.S. lift bans on Huawei — a central pillar in its next wave of economic development.
• But “U.S. leaders, for their part, have long been divided over whether to treat China as a partner that can be managed or a rival that must be ostracized,” Mr. Ip adds. “The Trump administration is itself split.”

We’ve already seen the U.S. change its mind, most notably over tech: It banned suppliers from selling to the Chinese company ZTE last year, then reversed course. More recently, it put a ban on suppliers selling to Huawei, then appeared to soften its stance. So determining exactly what the administration wants can be difficult.

Any more uncertainty could undermine the negotiations. A prominent Chinese state media outlet, Taoran Notes, has said that “if the U.S. flip-flops again in the negotiations, the promises to buy American agriculture products will also be overturned.”

• That could galvanize the Trump administration, which is facing growing frustration from the Farm Belt over the fact that China is buying barely any soybeans, its biggest export.

Who will lead the I.M.F.?

With Christine Lagarde poised to become the next president of the European Central Bank, there’s an opening at the top of the International Monetary Fund.

By tradition, a European heads the I.M.F., Alan Rappeport and Amie Tsang of the NYT write. (The leader of the World Bank is usually an American.) Some names that are appearing on early shortlists include:

• Tharman Shanmugaratnam, who was the chairman of the fund’s International Monetary and Financial Committee.
• Agustín Carstens, a former deputy managing director of the monetary fund.
• Mohamed El-Erian, the former C.E.O. of Pimco.
• Mark Carney, the outgoing governor of the Bank of England.
• Kristalina Georgieva, the current C.E.O. of the World Bank.
• George Osborne, Britain’s former chancellor of the Exchequer, is reportedly interested.

There is some concern that President Trump may try to break with tradition by trying to install an American in the post. But given that there was little foreign resistance to Mr. Trump’s choice of David Malpass to lead the World Bank, that may not be an issue.

Whoever gets the job will face several challenges, including economic woes in Argentina, Venezuela and Turkey; a slowing global economy; and increasing protectionism amid Mr. Trump’s global trade war.

How Judy Shelton could remake the Fed

President Trump has nominated two candidates for the Federal Reserve’s board. Only one would be likely to push for changes in how the central bank operates.

Ms. Shelton has advocated returning to a gold standard for currency, which would peg the dollar’s value to the commodity. She has argued that it would create a more even playing field for international trade, by preventing foreign central banks from buying up government debt to help cheapen the national currency and make exports competitive.

She also wants the Fed to scrap a key rate-setting tool. Right now, the Fed charges banks for excess money they park with it, and it tweaks the amount to help influence rates. Ms. Shelton has said that it’s bad fiscal practice.

Both ideas have drawn criticism:

• Skeptics argue that a return to the gold standard is virtually impossible, because it would require other countries to agree and would leave the dollar exposed to swings in commodity prices.
• Ending interest on excess reserves would probably mean eliminating the Fed’s ability to buy and hold bonds to influence interest rates, a practice known as quantitative easing — which Mr. Trump is a big fan of.

Some skeptics say she may be too unpredictable to join the board. Ramesh Ponnuru of Bloomberg Opinion writes, “Shelton’s prescription for monetary policy has changed so dramatically, and her rationale for it makes so little sense, as to make her appointment to the Fed a gamble.”

More: Investors remain worried that short-term interest rates on Treasury bonds remain higher than longer-term ones, a so-called inverted yield curve that typically presages a recession.

Stock buybacks prop up corporate America

The U.S. economy is growing strongly. But a new report by JPMorgan Chase shows that business profits have been largely buoyed by companies buying back their own stock, Dion Rabouin of Axios points out — and that’s causing concern.

• “The overwhelming majority of tax cut savings has been spent by firms to buy back their own shares,” Mr. Rabouin writes.
• Last year alone, companies spent over $1 trillion on buybacks.
• “The trend has gotten so strong that Moody’s warned in May companies were spending more on buybacks and dividends than they were paying in taxes” before the 2017 cuts.
• David Kelly, a JPMorgan global market strategist, told Mr. Rabouin that the rising level of stock buybacks “is one major reason he and other market analysts are worried about continued growth of business output, stock prices and the broader economy.”
• “It could perpetuate the slower growth environment we’ve seen in this expansion,” Mr. Kelly said.

Consumers are spending. Businesses aren’t. Who’s right on the economy?

One of the hard things about projecting how the economy will evolve in the coming months is that two different sides of it are sending opposite signals, Neil Irwin of the Upshot writes.

• “American consumers keep buying stuff, driving solid growth through the first half of the year.”
• “But American businesses are sounding a more pessimistic note, pointing to softer growth ahead, or even contraction.”

That means American consumers are carrying the burden of keeping the economy out of a serious slump. And as the economic expansion reaches the decade mark, “the disconnect between the consumer side of the economy and the corporate side will eventually end in convergence.”

The big question for the economy heading into 2020 is how this all comes together, Mr. Irwin writes:

• “In the more optimistic view, the challenges facing the corporate sector turn out to be temporary — perhaps a cooling of trade tensions helps — and demand from domestic consumers soon returns businesses to a more expansionary mode.”
• “In a more pessimistic one, slumping business confidence and the cost of trade wars cause employers to pull back on hiring. A softer job market causes workers to become more cautious about their spending, and an overall economic slump results.”

Revolving door

Bruce Linton has stepped down as co-C.E.O. of Canopy Growth — but later said he was “terminated.”

The British bookmaker William Hill plans to close 700 stores, leading to 4,500 job cuts.

The once-hot game app HQ Trivia reportedly laid off about 20 percent of its employees.

The speed read

Deals

• Univision said that it is considering selling itself. (Variety)
• Amazon’s acquisition spree — $20 billion and counting since the start of 2017 — may slow amid scrutiny from Washington. And Britain’s competition regulator has begun an investigation into the tech giant’s investment in Deliveroo, the food delivery app. (WSJ, Guardian)
• Broadcom’s talks to buy Symantec show that the chip maker is acting like a private equity firm. Some critics say it’s going too farin that direction. (FT, Bloomberg Opinion)
• The first half of 2019 has been a banner period for I.P.O.s. The second half will be almost as busy. (Bloomberg)
• The German lighting company Osram agreed to sell itself to Bain Capital and the Carlyle Group for about $3.8 billion. (Bloomberg)

Politics and policy

• The Trump administration is still looking for a way to add a citizenship question to the 2020 census. It may do so through an executive order. (NYT, Axios)
• President Trump’s re-election campaign is worried about the civil war within the N.R.A., which could destroy one of its most important allies. (Politico)
• British forces and Gibraltar detained a supertanker thought to be carrying Iranian oil, in violation of E.U. sanctions. (NYT)
• Representative Justin Amash, the only Republican to advocate impeaching Mr. Trump, has left the G.O.P. (NYT)
• An Ohio retailer donated $750,000 worth of fireworks to Mr. Trump’s July Fourth celebration in Washington. The same day, the White House decided to hold off on a new round of tariffs on Chinese goods, including fireworks. (ABC News)

Tech

• The U.S. government publicly defended a law restricting federal agencies from buying Huawei equipment. Also: Huawei thinks the internet of things will be the next battleground between China and the U.S. (WSJ, FT)
• Samsung expects its second-quarter operating profit to fall by 56 percent from the same time a year ago, as memory-chip demand sags amid the trade wars. (WSJ)
• The email start-up Superhuman made changes to its message tracking techniques after criticism from privacy advocates. (Business Insider)
• A federal judge refused to pause the implementation of a huge antitrust ruling against Qualcomm. (Reuters)
• Bitcoin consumes more energy than Switzerland, according to University of Cambridge researchers. (Center for Alternative Finance)

Best of the rest

• Chris Cline, a billionaire coal mining entrepreneur, reportedly died yesterday in a helicopter crash. (NYT)
• Boeing has pledged $100 million to those affected by the crashes of its 737 Max jets. (NYT)
• “Why parts of Wall Street are fretting over ‘toxic’ loans.” (FT)
• The Hollywood producer Riza Aziz, who was behind “The Wolf of Wall Street,” has been charged with crimes related to the 1MDB scandal. (NYT)
• Why is there so much Saudi money in American universities? (NYT)
• Borrowing against art is now a Big Thing. (Economist)

Thanks for reading! We’ll see you next week.

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