The Economist - USA (2020-11-21)

64 Finance & economics The EconomistNovember 21st 2020

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A

t the very last minute, the lawyers of

Christian S tried to stop his trial, argu-

ing that the 77-year-old former bigwig with

M.M. Warburg, one of Germany’s oldest

private banks, was too frail to attend court

in a pandemic. But on the evening of No-

vember 16th Germany’s constitutional

court ruled that the trial could go ahead the

next day. With judges, lawyers and the ac-

cused wearing contraptions that looked

like oversized diving masks, each shielded

by a perspex partition, a prosecutor read

out the charge sheet. It took so long that the

judge ordered a break halfway through.

Mr S, who cannot be fully named due to

reporting restrictions in Germany, is one of

four Warburg bankers accused of grave tax

evasion through so-called “cum-ex” tran-

sactions in 13 cases between 2006 and 2013

that cost the German taxman more than

€325m ($386m). (The other three will be

tried separately.) Cum-ex trades are share

transactions done at high speed on or just

before the day dividend payments are re-

corded. Before payment, shares come with

(cum) dividends, which are reflected in

their prices; after, they come without (ex).

A flurry of deals may allow two or more in-

vestors to reclaim tax on a given dividend,

even though it has been paid just once.

The defendant said very little. He was a

confidant of Christian Olearius, the patri-

cian co-owner of the Hamburg-based bank

who was head of its supervisory board until

he resigned last year, because of his alleged

involvement. (Mr Olearius denies any

wrongdoing.)Lastmonththeeffectsofthe

scandalrippledouttothepoliticalsphere,

seemingtodrawinOlafScholz,Germany’s

financeministerandaformermayorof

Hamburg.Thecity’sparliamentlaunched

aninvestigationintowhyHamburgunder

MrScholzlet€47moftaxpaymentsowed

bythebanklapseundera statuteoflimita-

tions.Asmayorin2016,MrScholztwice

metMrOlearius,a donorto,andfund-rais-

erfor,thecity’sculturalvenues;hesays

suchmeetingswithbankersandbusiness-

menwerecustomary,andthathecannot

rememberwhatwasdiscussed.Warburg

saystheinvestigationispurelypolitical,as

MrScholzistheSocialDemocraticParty’s

candidateforthechancellorship.

This is the second cum-ex trial. In

Marchthesamecourtfoundtwoformer

Britishbankersguiltyoftaxevasion.They

receiveda suspendedsentenceastheyhad

co-operated with prosecutors. Warburg

came upfrequentlyduringthe trialbe-

causeofitsroleinthetradesmadebythe

Britishduo.Itwasorderedtopayaround

€176maspartoftheMarchruling.Itsaysit

hasnotbreachedanylawsandisappealing.

ThelawyersforMrS maintaineda simi-

larline.Thetrial,whichisduetoconclude

inJanuary,seemslikelytobemorecon-

frontational thanthefirst—and perhaps

moreembarrassingforGermany’spolitical

and financial classes. Many expect Mr

Oleariustobeindictedsoon.

Whateverhappens,Warburg’sstanding

mayhavealreadysuffered.“Itmighthave

gambledaway thetrustof clients,”says

ChristopherKopperofBielefeldUniversity.

Itsfuturedependsonhow muchitwill

havetopayoutwhenallthefinesaretotted

up—andwhethercustomersabandonthe

grandoldbank. 7

BONN

A tax-fraud scandal draws in

Hamburg’s financial and political elite

Tax evasion

Court controversy

I

n may pnc, America’s seventh-largest re-

tail bank by assets, sold a stake in Black-

Rock, an asset manager, for $17bn. Bill

Demchak, pnc’s boss, said at the time that

worries about the economy had prompted

it to divest, in order to “bullet-proof” its

balance-sheet. On November 16th he broke

cover. pncsaid it would buy the American

arm of bbva, Spain’s second-largest bank,

for $11.6bn. The deal could set off a scram-

ble for scale on both sides of the Atlantic.

Indeed, bbvain turn said on the same day

that it was in merger talks with Sabadell,

another Spanish lender.

Scale has become increasingly impor-

tant for retail banking in America. It is

dominated by four giants—JPMorgan

Chase, Bank of America, Wells Fargo and

Citigroup—that have amassed branches

while lavishing spending on marketing

and technology. The investment in digital

banking has paid off during the pandemic,

as flashy apps have attracted a growing

share of deposits. At the same time, the

Federal Reserve’s low interest rates are

squeezing lending margins. That hurts re-

gional banks most: they rely more on inter-

est income from loans than their Wall

Street rivals, which also earn fees on trad-

ing and investment-banking activities.

pnc’s acquisition of bbva usa Banc-

shares is the largest banking deal in Ameri-

ca since bb&tbought SunTrust for $28bn

last year. It will create the country’s fifth-

largest retail bank (see chart). The com-

bined entity will be a coast-to-coast fran-

chise operating in 29 of the country’s 30

largest markets: half of bbva’s branches are

in Texas, and the rest span southern states,

where pnc’s presence is limited. Still, pnc

may seek to expand further. It has excess

capital to deploy, in part because regulators

have capped dividends and banned share

buybacks. And America’s field of mid-size

banks remains crowded. At least 30 lenders

have assets of around $50bn-250bn.

The price tag on bbva’s American fran-

chise amounts to about 30 times its pro-

jected earnings in 2021, according to an-

alysts at ubs, a bank. That is a lot for a unit

that has long underperformed, posting re-

turns on equity of around 6-7% (bbva’s

Mexican arm, which is comparable in

terms of risk-weighted assets, routinely

produces returns of 20% or more). But pnc

has demonstrated a knack for turning

round ailing ventures, notably the Ameri-

can arm of rbc, a Canadian bank, which it

snapped up in 2012. Investors seem confi-

dent pnccan repeat the trick: the bank’s

The sale of bbva’s American unit to

pncmay set off a wave of mergers

Retail banks

Bye bye America

Nearer the big league

United States, largest commercial banks

AtJune30th2020,byassets,$trn

Source:FederalReserve

BNY Mellon

Capital One

TD Bank

Truist Bank

US Bank

PNC/BBVA

Citigroup

Wells Fargo

Bank of America

JPMorgan Chase

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