The rise and dramatic fall of European investment banks in the US

Europe’s lenders spent billions to crack the American market. But many have made a humbling retreat

Laura Noonan in New York

© FT montage

When HSBC interim chief executive Noel Quinn announced a dramatic overhaul last month to try to restore the bank’s fortunes, he took aim at what has now become a familiar target for European bank bosses — the US market.

HSBC, which was just last year talking about adding 50 more retail branches to its 220-strong US network, is now closing 30 per cent of its branches after admitting the division is lossmaking. Its US trading business is in the line of fire too; Mr Quinn is cutting its assets as measured by risk by 45 per cent, a bigger reduction than HSBC’s businesses elsewhere, after profits from the US markets business fell by more than 20 per cent last year.

The announcement was the latest in a series of humbling withdrawals by European banks from the US market. Last year Deutsche abandoned its quest to be part of Wall Street’s elite by closing its global equities business and cutting thousands of jobs.

UBS cut back much of its US bond trading business after the financial crisis, while Credit Suisse is also a much smaller force in the US, having pared back its investment bank and leaving US private banking in recent years.

These cuts represent a dramatic retreat from the two decades when European banks went on an acquisition spree in the US in a bid to capture part of the world’s most lucrative banking and trading markets.

Former Barclays Chief Executive Bob Diamond Gives Evidence To The Treasury Select Committee On Interest Rate Fixing...LONDON, ENGLAND - JULY 04: Former Barclays Chief Executive Bob Diamond leaves Parliament in a taxi on July 4, 2012 in London, England. Mr Diamond, who resigned as Barclays Bank Chief Executive yesterday, was questioned by the Treasury Select Committee about inter-bank interest rate-fixing that caused the bank to be fined £290 million. (Photo by Matthew Lloyd/Getty Images)
Bob Diamond was chief executive of Barclays when it bought Lehman Brothers © Matthew Lloyd/Getty

Through deals such as Deutsche’s 1998 acquisition of Bankers Trust, Credit Suisse’s 2000 takeover of DLJ and HSBC’s 2003 purchase of consumer finance business Household, European banks pumped billions into the pre-crisis US market. Barclays joined the party later with the most prestigious deal of them all, the $1.75bn takeover of Lehman Brothers at the height of the crisis.

Amid the acquisitions, European banks hired some of Wall Street’s top dealmakers, won places on prestigious deals and became big players in areas such as leveraged finance and fixed-income trading.

“From 2002 to 2007 there was tremendous [market] share growth by the Europeans,” says a senior European investment banker of that era. “I don’t believe any of those banks would have got to where they were organically.”

But those heady ambitions now lie in tatters.

Line chart of $bn showing European investment banking fees struggled to match US rivals

For some observers, the swingeing cuts now being made are a recognition that few Europeans have built strong businesses in the US. “We do not see European bank management creating value to their shareholders with US . . . operations and would welcome exit strategies,” says Kian Abouhossein, JPMorgan’s head of European banks analysis.

Yet some of the bankers who were involved in the expansion believe that it was a lack of ambition — not overreaching — that has left the European banks in such a dilemma now.

“It’s very hard to retain the best people in the industry when your goal is to be number six,” says Ken Moelis, one of the most prominent investment bankers in Los Angeles who was hired by UBS and later founded his own boutique investment bank.

Ken Moelis, founder of Moelis & Company investment banking firm....Ken Moelis, founder of Moelis & Company investment banking firm.
Investment banker Ken Moelis: 'It’s very hard to retain the best people in the industry when your goal is to be number six' © Pascal Perich/FT

European lenders’ first move on the American market was in 1978, when Credit Suisse made what proved to be a trendsetting investment in top tier Wall Street advisory firm First Boston.

The Swiss bank took a controlling stake in its American partner in 1988. By 1998, Credit Suisse looked to have cracked one of the world’s most exclusive clubs, ranking third in US investment banking fees ahead of both Goldman Sachs and Morgan Stanley, according to Dealogic.

Meanwhile, European banks were increasingly rankled by competition on their home turf from the likes of Goldman Sachs and JPMorgan, who arrived in London in the 1990s and could offer round-the-world services to corporate clients.

Enter Deutsche. In 1998, after years pondering how to crack the US market, the German lender set the record for the largest foreign takeover of an American bank with its $10bn purchase of Bankers Trust. “There wasn’t a hell of a lot of discussion,” recalls a Deutsche management board member of that era. “There was a sense that scale is everything.”

Two years later, Credit Suisse doubled down with its $11.5bn acquisition of leveraged buyout specialist DLJ, and UBS snapped up brokerage Paine Webber for $12bn that same year. HSBC spent $14.8bn on Household in 2003.

Bar chart of Three-year average revenues ($bn) showing Strong local economy helped US banks grow faster than European rivals

Bolstered by their acquisitions, the European investment banks had some of Wall Street’s most famous rainmakers at their disposal. They included Mr Moelis, Blair Effron, his colleague at UBS who set up private equity house Centerview, and Tony James, who also worked at Credit Suisse in that era and is now the number two at private equity group Blackstone.

“I joined in 2001 and to me it was an opportunity,” says Mr Moelis. “UBS had Warburg in Europe, it had just merged with Paine Webber, they really had nothing in the US, they were merging two very suboptimal investment banks . . . I did think I could bring them the US.”

An executive who sat on Deutsche’s management board at the time of the Bankers Trust acquisition says the deal “totally changed the dynamic of the conversation with senior US bankers [Deutsche was trying to hire]. Deutsche Bank had a credible platform overnight.” Deutsche was able to muscle its way into some landmark deals, including a 2012 mandate to advise AIG on its return to the public market.

But even in the period before the financial crisis, which European banks regard as their heyday in the US, their record was patchy. Deutsche was the eighth-biggest earner of investment banking fees in 2002, its $872m far behind the $2.6bn earned by market leader Bank of America. By 2007, Deutsche had fallen to ninth, with $1.6bn of fees versus JPMorgan’s $4.4bn.

Christian Meissner, head of global corporate and investment banking at Bank of America Corp., speaks during a Bloomberg Television interview in New York, U.S., on Tuesday, May 27, 2014. Meissner spoke about the bank's involvement in sports-franchise transactions, corporate mergers and acquisitions, and the outlook for investment banking. Photographer: Scott Eells/Bloomberg
Christian Meissner, head of investment banking for Bank of America Merrill Lynch from 2010 to 2019, says 'none of the European banks have been sufficiently consistent about building a business in the US' © Scott Eells/Bloomberg

Barclays and UBS also remained outside the top five players in most areas of investment banking, leaving Credit Suisse as the only one that really challenged the Americans.

Although their trading operations expanded, the underlying profitability was unclear — especially as some of the profits they booked were linked to mortgage-related trades that later registered large losses. Retail operations also struggled, such as HSBC’s Household business, which it closed to new business a few years after buying it.

“I’m not sure any large British bank and maybe no European bank has ever made money over a couple of credit cycles in the US market,” says Paul Tucker, a former deputy governor of the Bank of England who is now at Harvard University.

A former European bank CEO says banks “went to enormous lengths to disguise” the economics of their US businesses. “They were trying to fool not only the clients but in some cases your own employees.” If employees had known how bad it was, they would have decided it was “better get a job down the road”.

Bob Diamond, chief executive of Barclays when it bought Lehman, stands firm. “They were all real, with the exception of subprime,” he says of the profits that Barclays enjoyed in that period. “And that was pretty much true across the industry.”

Paul Tucker, outgoing Deputy Governor of the Bank of England. photographed in his office.
Paul Tucker, a former deputy governor of the Bank of England: 'I’m not sure any large British bank and maybe no European bank has ever made money over a couple of credit cycles in the US market' © Charlie Bibby/FT

Whether the pre-crisis years were a boom or not for European banks in the US, many executives believe that the seeds for their decline were laid in that period.

“European banks had a false dawn,” says one senior investment banker, adding that from 2012 to 2019 their fortunes went down in a “straight vertical line”.

European policymakers say the region’s banks were allowed to take excessive risk. Unlike in Europe, the US has had an absolute cap on leverage since 1981. European banks expanded their balance sheets to 60 times their common equity in the run-up to the crisis, versus 35 times leverage at their US peers, as they built up far bigger trading exposures.

“(There were) abject failures of supervision. Partly regulatory failures as well,” says one former official.

In the decade since the crisis, the relative weakness of the European economy compared with the US has left the continent’s banks at a disadvantage and given their American rivals more resources to expand.

The US industry also benefited from the more proactive approach to bailing out banks in the aftermath of the financial crisis. “The government capital that helped put those guys hack on their feet meant that those competitors came back,” says one Credit Suisse banking executive. “I thought those guys would pay a heavier price for being wrong and have to struggle.”

For the bankers, the biggest reason for the fall in profits in the US has been regulation. They cite everything from the Federal Reserve’s 2008/09 decision to force foreign banks to ringfence and fully capitalise their US operations by 2016, to global capital rules that struck at the fixed income businesses which were the core of Barclays’ and Deutsche’s Wall Street operations.

Bar chart of Three-year average net income ($bn) showing American economy drove post-crisis earnings bounce at US banks

Frustrated by bureaucracy and centralised management, the cadre of star dealmakers at European banks gradually departed for more lucrative pastures, often setting up their own operations and taking their clients with them.

“I went there to create something great,” says Mr Moelis of his 2007 decision to quit UBS. “I don’t think they wanted to be great. They wanted to be good. Some of the European banks, their mentality was, let’s just get good.”

Christian Meissner, the head of investment banking for Bank of America from 2010 to late 2018, says “none of the European banks have been sufficiently consistent about building a business in the US and, while they’ve been able to attract talent, they’ve rarely been able to keep it over an extended period,” he says.

“They really had nothing to bring to the table but money,” argues the former CEO of a large European bank. “Partly as a consequence, the US bankers had little respect for them and felt super-entitled to rip them off.”

A worker carries a box out of the U.S. investment bank Lehman Brothers in London...A worker carries a box out of the U.S. investment bank Lehman Brothers offices in the Canary Wharf district of London September 15, 2008. The ruptured U.S. financial system faces an unprecedented shake-up with Lehman Brothers filing for bankruptcy, Bank of America buying Merrill Lynch and the Federal Reserve saying for the first time it will accept stocks in exchange for cash loans. REUTERS/Andrew Winning (BRITAIN)
A worker carries a box out of Lehman Brothers in London in 2008. Barclays completed a $3.25bn takeover of Lehman Brothers at the height of the financial crisis © Andrew Winning/Reuters

He adds that while Goldman “steered by the wind and stars like Polynesian sailors” as it allocated capital into areas of high returns and pulled back when markets turned, European companies were “highly structured” in their planning and not responsive enough to changing conditions.

Nowhere was this more evident than at Deutsche, which last summer finally made the kind of cuts to its investment bank that rivals Barclays and UBS had made more than five years earlier and US banks made earlier still.

Deutsche insiders now privately accept that mistakes were made. The bank rushed to celebrate its early successes after the crisis when it should have been more circumspect. Top management believed changes in the industry — such as new capital requirements and lower fees — would be temporary and the bank paid a catastrophic price, racking up cumulative group-wide pre-tax losses of almost €7bn in the five years to the end of 2019.

HSBC interim chief executive Noel Quinn said last week his bank could get “acceptable returns” over the medium term from a transformed US operation, which would be an important part of HSBC’s global business. Deutsche made similar arguments last summer when it announced cuts.

Still, most outsiders are downbeat about the Europeans’ prospects, arguing that technology has made scale more important than ever in investment banking, while negative interest rates in Europe leave the continent’s banks with a weaker financial base to build from.

“You have this bifurcation,” says Mr Moelis. “[If you want] money and capital and size, go to JPMorgan, Citi etc. If you want scale, they [European banks] are not there. If you want nimble and smart you’re going to go to us [boutiques]. I think the middle is the killing field.”

The future of European banks on Wall Street is “linked to a bigger question”, Mr Tucker says.

“In the new geopolitics, can you be a serious continent without some of your own global universal banks?”

The British view, he says, has been that ownership of the banking sector is not an issue “so long as finance is open, sound and honest, and the domestic economy well served”. But he adds: “The Paris view has been no, we need big international firms who somehow are aligned in a loose but meaningful way with our national or continental interest.”

A European investment bank boss puts it more bluntly. “Investment banks are the ultimate bastions of capitalism,” he says. “Europe is not a bastion of capitalism. There’s political pressure against the forces of capitalism . . . It’s just harder to succeed.”

An American firm’s investment banking head singles out Barclays as “the only one that has a shot” but says it is “as much of an American firm as they are a European one” thanks to the Lehman acquisition.

One senior European investment banker is even more dismissive: “There was a brief period in 2000-07 when it was possible to compete as a global investment bank with headquarters outside the US. We’re back to investment banking being an exclusively US industry.”

A Balancing Act for Europe: Stop the Migrants, Support Greece, Assuage Turkey

Europe bought time after the migrant crisis of 2015. It just didn’t use it very well. Now it may pay a price.

By Steven Erlanger

Stranded asylum seekers at Turkey’s Pazarkule border crossing with Greece.Credit...The New York Times

BRUSSELS — The European Union still has nightmares about the mismanaged chaos of the 2015 influx of migrants and refugees, which produced horrible pictures of dead children, masses of unregistered people wandering the roads, political divisions and a significant boost to far-right populism across the Continent.

Turkey’s vow to let hundreds of thousands more leave for Europe has done more than revive those fears. It has exposed Europe’s failure to use the time bought since 2016, when it made a deal to pay Turkey to house migrants and refugees, to create a coherent migration or asylum policy.

So Europe once again finds itself in a quandary, trying to tread a line between two NATO members, Turkey and Greece, one trying to push refugees forward, the other trying to keep them out.

There is little doubt that Europe, beyond Greece, wants neither the migrants nor another crisis. European Union leaders made that clear enough this week, when they traveled to Greece to display solidarity with sometimes harsh Greek efforts by a new center-right government to keep any new migrants or refugees away.

“Our first priority is making sure that order is maintained at Greece’s external border, which is also Europe’s border,’’ said Ursula von der Leyen, the European Commission president.

For the European Union, it is an awkward moral clash with its professed values of protecting human rights, individual dignity and the right to seek asylum under international law, which Greece says it has suspended for now.

But it is also a deeply political problem, given the way populists from Viktor Orban in Hungary to Matteo Salvini in Italy and the Alternative for Germany party have profited from the chaos of 2015 and the influx of more than a million people, mostly Muslim. The populists have vowed loudly to defend European and national borders, and identity.

Then there is the problem of President Recep Tayyip Erdogan of Turkey, who has created many of his own difficulties, but who has also, mostly alone, taken on problems the Europeans have chosen to ignore.

The signs have been building for some time that the Syrian regime of Bashar al-Assad, with Russian and Iranian military support, was bound to move to crush the last redoubt of revolution in Idlib Province, which borders Turkey.

“It shows that Europe’s complete holiday from geopolitics always ends up being very costly,’’ said Mark Leonard, director of the European Council on Foreign Relations. “Europe again is in full spectator mode, incredibly passive through the whole Idlib crisis, which was predictable and predicted.’’

But Mr. Erdogan’s manipulations to try to wrench help from the Europeans have done much to alienate his potential allies.

He has tried to leverage relations with Russia against Europe and the United States, even as he has confronted Russian troops and proxies in both Syria and Libya.

He also pleaded for help defending Idlib, to prevent another million refugees pouring into Turkey, while at the same time weaponizing the migrants and refugees he currently houses against Europe.

None of this has made Mr. Erdogan friends.

Still, Turkey is a key member of NATO. Its forces are preventing what could be a massacre in Idlib. And it is also defending the United Nations-backed government of Libya.

So the dilemma for Europe and NATO is complicated: simultaneously to support Mr. Erdogan, try to pull him back into line against Moscow, and resist what Europeans consider his migration blackmail. 
“Erdogan wants to protect the last opposition stronghold in Idlib and wants to avoid another wave of refugees,’’ said Amanda Sloat, a former State Department official dealing with Turkey who is now at the Brookings Institution.

“He’s rightly frustrated that the bulk of the Syrian refugee crisis has fallen on him to manage,’’ Ms. Sloat said. ‘‘But it’s problematic for him to try to blackmail the E.U. to help him by opening the gates, even as at the same time the E.U. and the international community are not stepping up to the problem.’’

Mr. Erdogan’s Turkey is hosting some four million migrants and refugees, and argues that Brussels is not keeping its promises under the 2016 deal, which set out 6 billion euros in aid for Turkey — though not directly to the government — and promised efforts to resettle legitimate refugees inside Europe.

Brussels argues that it has kept the essence of the deal, so far signing contracts for 4.7 billion euros and disbursing 3.2 billion euros. But Europe has resettled fewer than 27,000 Syrians from Turkey in four years.

European Union officials are quietly talking to Turkey about providing further help, but there is no sign that European nations will provide the military support Mr. Erdogan wants to create a “safe zone” in Idlib and a no-fly zone there.

The bloc’s foreign policy chief, Josep Borrell Fontelles, announced 60 million euros’ worth of aid for the most vulnerable people in northwest Syria after talks on Wednesday in Ankara with Mr. Erdogan. Senior E.U. officials had announced a much larger sum, 700 million euros, in new aid to Athens to help it tackle the migrant crisis.

European officials point out that the border between Idlib and Turkey is tightly shut and that so far there is no new influx of Syrian refugees.

So did Asli Aydintasbas, a Turkish analyst with the European Council on Foreign Relations in Istanbul. She also noted that there are few Syrians among the thousands of asylum seekers Mr. Erdogan has encouraged to try to get into Greece.

“These are not people from Idlib, and many are not from Syria,’’ she said. “They are mostly Afghans, Iraqis and Iranians — the Syrians in Turkey are pretty settled there and have not moved back to areas near Syria.’’

Ms. Aydintasbas said Mr. Erdogan was trying to secure more funds for his government, which faces mounting economic difficulties. But Turkey also wants to get European and NATO attention on Idlib, contain the Kurds, and shift a dangerous domestic debate about the costs of Turkey’s war inside Syria to the refugee crisis, she said.

She noted that after the deaths of at least 36 Turkish soldiers in Syria last week, the Turkish government shut down Twitter for a day, trying to mute criticism.

Mr. Erdogan’s gamble with Russia appears to be failing, too, Ms. Aydintasbas said.

The government annoyed NATO and European allies, she said, by buying the Russian S-400 antiaircraft system “with much fanfare, with much talk from the government of Turkish independence.’’

“But now,” she said, “when push comes to shove, Turkey needs Western support.”

The footsie with Moscow has done little to stop Russia and Syria’s brutal advance in Idlib. “These are huge blunders that even the man and woman on the street can see,’’ Ms. Aydintasbas said.

Robin Niblett, the director of Chatham House, a research institution in London, said the use of non-Syrian refugees to try to pressure the Europeans “just feeds into all the cynicism about Turkey.’’

“This broader flow of economic migrants just reminds everyone in Europe that you need to fix it,’’ he said.

But Mr. Niblett also criticized the Europeans for their “active absence from the Syrian conflict, the lack of strategic thinking and involvement.’’

He said there seemed to be a quiet European hope that Russia and Mr. Assad would simply finish the job in Syria, no matter how ugly it might get, given that Idlib is also the last refuge for a sizable contingent of Al Qaeda as well as other Islamist opponents to Mr. Assad.

The same may hold for Libya, where France, for example, supports the strongman Khalifa Hifter along with Russia, while Turkey supports the weak U.N.-backed government.

In a sense, Mr. Niblett said, there is the beginning of a more realist European foreign policy, which will continue to pay off Mr. Erdogan to avoid a new wave of refugees.
“But of course you cannot build a formal foreign policy like that and get any support from European parliaments, because it goes against all Europe stands for in its values,’’ Mr. Niblett said.

Will the Coronavirus Topple China’s One-Party Regime?

In the post-Mao era, the Chinese people and Communist Party leaders have adhered to an implicit social contract: the people tolerate the party’s political monopoly, as long as the party delivers economic progress and adequate governance. The party’s poor handling of the COVID-19 outbreak has threatened this tacit pact.

Minxin Pei

pei60_Pang XingleiXinhua via Getty Images_xijinpingchinacommunistpartycoronavirus

CLAREMONT, CALIFORNIA – It may seem preposterous to suggest that the outbreak of the new coronavirus, COVID-19, has imperiled the rule of the Communist Party of China (CPC), especially at a time when the government’s aggressive containment efforts seem to be working.

But it would be a mistake to underestimate the political implications of China’s biggest public-health crisis in recent history.

According to a New York Times analysis, at least 760 million Chinese, or more than half the country’s population, are under varying degrees of residential lockdown. This has had serious individual and aggregate consequences, from a young boy remaining home alone for days after witnessing his grandfather’s death to a significant economic slowdown. But it seems to have contributed to a dramatic fall in new infections outside Wuhan, where the outbreak began, to low single digits.

Even as China’s leaders tout their progress in containing the virus, they are showing signs of stress. Like elites in other autocracies, they feel the most politically vulnerable during crises. They know that, when popular fear and frustration is elevated, even minor missteps could cost them dearly and lead to severe challenges to their power.

And “frustration” is putting it mildly. The Chinese public is well and truly outraged over the authorities’ early efforts to suppress information about the new virus, including the fact that it can be transmitted among humans. Nowhere was this more apparent than in the uproar over the February 7 announcement that the Wuhan-based doctor Li Wenliang, whom the local authorities accused of “rumor-mongering” when he attempted to warn his colleagues about the coronavirus back in December, had died of it.

With China’s censorship apparatus temporarily weakened – probably because censors had not received clear instructions on how to handle such stories – even official newspapers printed the news of Li’s death on their front pages. And business leaders, a typically apolitical group, have denounced the conduct of the Wuhan authorities and demanded accountability.

There is no doubt that the authorities’ initial mishandling of the outbreak is what enabled it to spread so widely, with health-care professionals – more than 3,000 of whom have been infected so far – being hit particularly hard. And despite the central government’s attempts to scapegoat local authorities – many health officials in Hubei province have been fired – there are likely to be more questions about what Chinese President Xi Jinping knew.

Not surprisingly, Xi has been working hard to repair his image as a strong and competent leader.

After the central government ordered the lockdown of Wuhan in late January, Xi appointed Premier Li Keqiang to lead the coronavirus task force. But the fact that it was Li, not Xi, who went to Wuhan seemed to send the wrong message, as Xi realized in the subsequent days.

On February 3, at a Politburo Standing Committee meeting, Xi took an unusually defensive tone in a speech that smacked of damage control. While Xi admitted that he had learned of the outbreak before he sounded the alarm, he emphasized his personal role in leading the fight against the virus.

Moreover, on February 10, Xi made a series of public appearances in Beijing, aimed at reinforcing the impression that he is firmly in command. Three days later, he sacked the party chiefs of Hubei province and Wuhan municipality for their inadequate handling of the crisis. And two days after that, in an unprecedented move, the CPC released the full text of Xi’s internal Politburo Standing Committee speech.

Though Xi has apparently regained his aura as a dominant leader – not least thanks to CPC propagandists, who are working overtime to restore his image – the political fallout is likely to be serious. The profound uproar that marked those fleeting moments of relative cyber-freedom – the two weeks, from late January through early February, when censors lost their grip on the popular narrative – should be deeply worrying to the CPC.

Indeed, the CPC may be highly adept at repressing dissent, but repression is not eradication. Even a momentary lapse can unleash bottled-up anti-regime sentiment. One shudders to think what might happen to the CPC’s hold on power if Chinese were able to speak freely for a few months, not just a couple of weeks.

The most consequential political upshot of the COVID-19 outbreak may well be the erosion of support for the CPC among China’s urban middle class. Not only have their lives been severely disrupted by the epidemic and response; they have been made acutely aware of just how helpless they are under a regime that prizes secrecy and its own power over public health and welfare.

In the post-Mao era, the Chinese people and the CPC have adhered to an implicit social contract: the people tolerate the party’s political monopoly, as long as the party delivers sufficient economic progress and adequate governance. The CPC’s poor handling of the COVID-19 outbreak threatens this tacit pact. In this sense, China’s one-party regime may well be in a more precarious position than it realizes.

Minxin Pei is Professor of Government at Claremont McKenna College and a non-resident senior fellow at the German Marshall Fund of the United States.

What the Houthis Want in Yemen’s Civil War

By: Hilal Khashan

In March 2015, Saudi Arabia launched Operation Firmness Storm against the Houthi rebels, who had taken control of large swathes of territory in Yemen. Five years later, on March 1, 2020, the Houthis scored a significant victory, capturing al-Hazm (which, ironically, means “firmness” in Arabic), the capital of al-Jawf province, which shares a border with Saudi Arabia. The move demonstrated that the Houthis are still determined to keep Yemen’s protracted civil war going, half a decade after it began.

History of the Houthis

The Houthis derived their name from Hussein Badreddine al-Houthi, who, in 1992, founded a group called Harakat Ansarullah (meaning “partisans of Allah”) to promote the interests of the Zaydis, an impoverished and marginalized minority group in Yemen. He began his political career by joining al-Haqq Party, or the Party of Truth, which formed in 1990 to counter the Muslim Brotherhood-affiliated al-Islah Party.

Two years after the Yemeni army killed al-Houthi in 2004, his brother, Abdulmalik, assumed the top post in Harakat Ansarullah, which then rebranded itself as the Houthi movement.

The Zaydis are part of the Zaydism sect of Shiite Islam, but they are closer to Sunni Islam than the Shiite Twelver Imami sect that dominates in Iran and Iraq. They live in the Saada Mountains in northwestern Yemen and account for at least 30 percent of the country’s population. In 1962, a republican military coup put an end to Zaydi monarchical rule in Yemen, which had lasted for 11 centuries, leading to the Zaydis’ marginalization.

Their subsequent slide into impoverishment was the foundation of the Houthi movement before it developed into a political-military group after the 2003 U.S. invasion of Iraq. President Ali Abdullah Saleh’s alliance with the Salafi movement and accommodation of the al-Islah Party soured his relations with the Houthis. And after refusing to surrender the donations their supporters had given to them, the Houthis began clashing with the Yemeni army in 2004.

Many were surprised when the Houthis managed to seize the Yemeni capital of Sanaa in September 2014. Just two months earlier, and with the tacit support of President Abed Rabbo Mansour Hadi’s army, they had also captured Omran, a bastion of support for al-Islah.

But given Yemen’s fragmented tribal allegiances, the Houthis needed more than Hadi’s backing to maintain control over these areas. Even though the Houthis had fought six wars against Saleh’s military forces from 2004 to 2010, the two sides became allies in 2014.

Saleh still wielded substantial influence over many army units, including the elite Republican Guard. The new alliance facilitated the Houthis’ conquest of most of northern Yemen. But both Saleh and the Houthis were alarmed at the rise of the Muslim Brotherhood in the wake of the Arab uprisings, especially in Egypt and Tunisia.

The Saudis and Emiratis expressed similar apprehensions about al-Islah in Yemen and, viewing the Houthis as a lesser evil, privately supported the Houthis instead. Thus, Houthi official Saleh Habra flew to London to meet with Bandar bin Sultan, the Saudi secretary-general of the National Security Council, to discuss ways to stop al-Islah.

And the UAE gave the Houthis, through the Dubai-based son of Ali Abdullah Saleh, $1 billion to cover the cost of their military drive against al-Islah in Omran and Sanaa. Publicly, however, Riyadh and Abu Dhabi expressed concern over the fall of Sanaa to the Houthis. Saudi preacher Abdulaziz al-Tarefe even issued a proclamation that considered jihad against the Houthis a sacred duty.

The religiously driven, organized and well-structured Houthis eventually took over northern Yemen from Saleh and his party, the General People’s Congress. They also took advantage of Hadi’s cooperation with Saudi Arabia and Abu Dhabi’s desire to see South Yemen become an independent state.

The Houthis have insisted on the implementation of an agreement that came out of the National Dialogue Conference in 2014, even though it did not specifically address their grievances relating to the Zaydis or those of the Southern Movement. They have also dismissed the Saudi claim that they are a Trojan horse for Iran, which supplies them with cash, light weapons, missile components and technical assistance. Iran’s relationship with the Houthis is fundamentally different from its relationship with Hezbollah.

The Lebanese party is ideologically committed to the principles of the Iranian Revolution and its supreme leader. The Houthis, on the other hand, are more independent, though they have adopted their own version of some of the fiery proclamations of Ayatollah Ruhollah Khomeini, such as the group’s slogan “Allah is Greater, death to Israel, death to America, curse on the Jews, victory to Islam.”

The Saudis’ Role

In 2009, the Houthis challenged the Saudis directly, capturing al-Dukhan Mountain in Saudi Arabia’s Jizan region and some 50 villages, after King Abdullah allowed the Yemeni army to attack the Houthis in Saada from Saudi territory. Since then, the Saudis have refused to accept that they have lost the influence they once had in Yemen and, beginning in March 2015, have waged war against the Houthis to reestablish their once powerful position in the country.

Houthi assurances that they would not allow penetration of Saudi territory from Houthi-controlled areas if the Saudis do not interfere in Yemen’s domestic affairs have not deterred the Saudis from engaging in the civil war, even though they were ill-prepared for it. (Despite massive military spending, the Saudi armed forces do not have a combat doctrine or army creed.)

Saudi Crown Prince Mohammed bin Salman reasoned that the Saudi armed forces’ sophisticated arsenal would easily and swiftly force the Houthis to capitulate, allowing Riyadh to reestablish hegemony in Yemen.

But things did not play out quite as the Saudis hoped. The Yemeni army has failed to retake Sanaa, and the Saudi-UAE coalition has effectively collapsed. (The UAE pulled its troops out of Yemen and is now focused on securing its interests with the southern secessionist movement.)

The once-ruling General People’s Congress did not sever its ties to the Houthis after they assassinated Saleh in 2017. And the Saudis have failed to pull al-Islah back to their side, after they betrayed the group in 2014. Riyadh therefore has no allies left in Yemen.

Many Yemenis continue to argue that the Saudis hold a grudge against Yemen and want to keep the country weak. As evidence, they point to Saudi agents’ 1977 assassination of Yemeni President Ibrahim al-Hamdi – in an operation strikingly similar to Jamal Khashoggi’s killing – because he refused to provoke an armed conflict with the communist government of South Yemen.

The mutual distrust between the Saudis and Yemenis, as well as the absence of a force capable of stopping the group, has enabled the Houthis to continue pursuing their strategic objectives in the civil war.

The Houthis’ Objectives

Which raises a question: What exactly are the Houthis’ strategic objectives in Yemen?

Their main objective is to keep the war going until they can dominate the country. They want to play a decisive role in Yemeni politics as per the Peace and National Partnership Agreement that they reached with Hadi’s government right after they took over Sanaa, which received the blessing of the Gulf Cooperation Council and the U.N. secretary-general.

The agreement called for the formation of a technocratic Cabinet, headed by a politically neutral prime minister, and the appointment of two advisers to the president, one Houthi and another from the Aden-based Southern Movement. The Houthis also want to control some of Yemen’s political institutions, especially the office of the prosecutor general, central control and accounting apparatus, and the departments of national and political security.

The Houthis reject Yemen’s republican order and consider it a consequence of the 1962 coup that ended Zaydist rule, which they want to reestablish. They objected to the Saudi-proposed GCC initiative to end the 2011 uprising because it preserved the former regime.

They also had serious issues with the National Dialogue Conference’s proposal to turn Yemen into a federation consisting of six regions because it favored Saudi Arabia. It would have given the Houthis control over landlocked Azal region, which includes Saada, Omran, Sanaa and Dhamar, but allocated nearby oil-rich areas to Saudi allies in Saba.

With no end in sight, the conflict in Yemen has turned into a war of attrition that is severely draining Saudi resources and hampering Riyadh’s Vision 2030 project to modernize the kingdom. The Houthis are playing the long game – a game in which they believe they will eventually prevail.