Titans of Finance Gather and Sulk Over Low Rates, Deutsche Bank

  • Fiscal policy, rules and radical politics seen as obstacles
  • Goldman’s Gary Cohn calls central banks ‘ineffective cartel’

Mary Callahan Erdoes, one of JPMorgan Chase & Co.’s most senior executives, summed up her industry’s mood like this: “There is no excitement,” she told throngs of bankers gathered in Washington. “There is a lot of handwringing.”

Again and again, speakers at the Institute of International Finance’s three-day meeting in Washington, which wrapped up Saturday, bemoaned the inability of central banks to rev up economic growth, as well as the drag of tougher regulations and the looming impact of Brexit. Concerns over Deutsche Bank AG’s mounting legal costs deepened the gloom.

Mary Callahan Erdoes

Photographer: Simon Dawson/Bloomberg

Slow growth is leaving companies little reason to expand, fueling the public’s frustration and giving rise to extreme political views and nationalism, said Erdoes, 49, who runs JPMorgan’s asset-management operations. Low interest rates -- instead of better fiscal stimulus -- are taking a toll on the entire system, she said. “We had a very smart economist at JPMorgan ask me the following question: How do you have capitalism without any cost of capital? And therein lies the problem.”

The 1,600 finance executives attended panel discussions at the Ronald Reagan Building and International Trade Center, a short walk from the Washington Monument. Among their biggest targets for criticism were international stimulus efforts. Goldman Sachs Group Inc. President Gary Cohn called the world’s central banks an “ineffective cartel,” as actions in Europe and Japan lead to negative rates and hamstring other policy makers. The outlook for low growth is long-term, he said.

For a QuickTake explainer on the world of low interest rates, click here

“I don’t see this changing,” Cohn said Friday. “We keep saying we’re getting closer to the end, but I don’t think we’re getting closer to the end.”

Getting Messier

Mohamed El-Erian, chief economic adviser to Allianz SE, agreed that central banks have lost an edge in an era of “ultra-low and negative interest rates.” He said companies have become more risk-averse.

“As we look to the next five years, I think that the world of low growth destroys itself,” El-Erian, who is also a columnist for Bloomberg View, said at a panel discussion on Saturday. “Politically it’s getting messier and messier,” influencing rate policy and leading to moves like Brexit.

Bank leaders including Morgan Stanley Chief Executive Officer James Gorman said tougher rules sparked by the 2008 financial crisis, while necessary, may now be another drag on the economy, and firms must figure out a way to prosper.

“If you want higher growth, you have got to let banks do what they do,” Gorman said. “This is an industry which is essential to global economic growth. The challenge is, we’re all in this together. So the banks have to collectively raise themselves to a standard of, not perfection, but global professionalism.”

Brexit Horror

The U.K.’s expected exit from the European Union after a referendum this year looks to be painful and “horrific,” Standard Chartered Plc CEO Bill Winters said at the conference. Others echoed his thoughts.

“I’m afraid I don’t see anything good here,” said David Wright, chair of EuroFi, during a Thursday discussion. “I see a host of second- and third-class decisions to be made. It’s bad for the U.K., for sure. It’s bad for Europe, for sure.”

Shares of the entire financial industry have swung in recent weeks on news that the U.S. Justice Department asked Deutsche Bank to pay $14 billion to settle an investigation into mortgage-backed securities. The bank has said it expects U.S. authorities to scale back their initial request, and that it has ample cash.

Deutsche Bank

Deutsche Bank is a counterparty to the largest European and U.S. banks. While the Frankfurt-based firm’s struggles weren’t the focus of the conference on stage, executives acknowledged there are financial and reputational risks whenever a member of the interconnected financial system flails.

Bankers huddled around coffee urns or over cocktails in the evening, discussing possible outcomes of the Deutsche Bank situation, whether the German government would be involved financially, what the repercussions for the European economy and their own firms could be. The latest rumors were shared, as well as advice for executives of the embattled firm.

The German lender hosted an opening-night reception for conference attendees at Smithsonian’s Renwick Gallery, a stone’s throw from the White House and several blocks from the Department of Justice. CEO John Cryan attended. Over the weekend, German newspaper Bild said he also went to Washington to help negotiate a settlement. The talks are continuing, according to people with knowledge of the matter.

Adjusting Businesses

“I have little doubt that Deutsche Bank will find its way through these problems,” Winters said in an interview during the conference. “John Cryan is doing exactly the right things to work through a difficult situation. I’m not saying it’s going to be easy, but they seem to be developing a relationship with their own government that’s intended to resolve their open issues.” 

The bankers, who gathered from regions including Asia, Africa and Eastern Europe, heard from a panel that global recovery remains slow and uneven, with growth expected to pick up only slightly next year -- mostly on account of emerging markets. Persistently low growth has exposed “underlying structural weaknesses, and risks further dampening potential growth and prospects for inclusiveness,” the panel found.

Bank executives said they were trying to adapt to the new environment.

“We’re clearly aware of the need to adjust our business models,’’ Societe Generale SA CEO Frederic Oudea said. “We’re managing a transition that’s tough.”

Dimon’s Slogan

JPMorgan CEO Jamie Dimon said at a Friday discussion that “monetary authorities are trying to figure out” what to do, but that the system lacks coordination. Policy makers failed to pass immigration reform, aren’t spending enough on infrastructure and are enacting onerous regulations, he said.

“Fiscal policy and monetary policy -- if we got those things right I think we would have extra growth,” Dimon said. Instead, “wherever I travel in the world, I’m just overwhelmed by comments from clients on what they can’t do because of rules.”

Asked if he would want to enter politics one day, Dimon replied that he would “love” to be president but wouldn’t run. He flashed a smile -- a cheerful moment amid the downbeat proceedings.

“My slogan: Make America Fun Again.”