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December 1999

Rabobank - Failed in London, try Frankfurt


Triple-A Dutch bank Rabobank wanted to build a flourishing international business in London. Things didn't go well, not least because the local staff were given too free a rein. A crackdown had to come. Now Rabo's taken a new tack, an alliance with Germany's DG Bank. It could be a fruitful match, but negotiations are protracted and the final arrangements far from settled. Laura Covill reports.




Bernd Thiemann
Not until the Grosvenor House ball was it obvious the end had come. Rabobank's London operation, particularly in equities, had been in trouble for months. The redundancies, hiring freezes and strategy reviews had begun in autumn 1998. Head of equities Marcus Grubb went shortly before Christmas, to be replaced by the man in charge of Dutch equities. Rampant overspending scuppered the Christmas party. Then Alex von Ungern-Sternberg, head of the investment-banking division, was thrown out too. His promise to turn a profit on equities after 12 months now seemed a bad joke.

The spring of 1999 brought a mysterious thaw. Management in Utrecht ordered bonuses to be paid out at once, even though they could have been paid in instalments over two or three years. A new investment-banking boss arrived from Citibank. In May, a huge ball was organized to celebrate belatedly the opening of the new trading floor. Hundreds of expectant staff turned up in black tie to meet their leader. Was this a new start?

It wasn't. The London branch manager kicked off with a misjudged joke about how Barclays had fired 6,000 people that day. Then Rabo chairman Hans Smits, who had been in office just a few weeks, delivered the coup de grace. "With a poker face he launched into a tirade about how the London operation was out of line and overspending and now was the time to feel the pain," says a witness. "Everyone was wondering when they'd get their P45s [end-of-employment tax certificates]." They found out less than a month later, when the entire equities division was closed down and 105 staff were sacked before 9am.

By the time of his rant at the ball, the chairman had long since activated Rabobank's plan B. As soon as he took up the post in March, Smits, who has a reputation as a quick, ruthless decision-maker, counted his mounting losses at Rabobank International, took stock of the situation - and put in a call to Frankfurt.

Hans Smits
Bernd Thiemann, chief executive of DG Bank, must have been delighted. He had been lobbying patiently for years to entice other big cooperative banks into a closer relationship, but had been snubbed by both Rabo and France's Crédit Agricole. It's reputation had been poor ever since its near-collapse at the beginning of the 1990s (before Thiemann arrived) at the hands of fraudster traders, incompetent managers at foreign branches and some very bad loans.

Even now, DG is constantly undermined by squabbling inside the German cooperative banking camp. The Dutch worried "that Rabobank could be used as a crowbar to crack their problems," as one Rabobanker says. Nevertheless it was a huge snub to DG when, in 1996, its fellow cooperative bank decided to go it alone and set up Rabobank International, a global institution for corporate and investment banking.

As a result, the loose alliance between the two banks was neglected and never amounted to more than half-hearted invitations into issuing and lending syndicates. Paul ffolkes-Davis, who was head of equity capital markets at Rabo until October, says he never met his counterparts at DG Bank.

The bank's Dutch directors were proud of doing things under their own steam with as little foreign assistance as possible. Like the rest of the Dutch nation, they have an ambivalent relationship with their large, powerful neighbour. They couldn't help telling everyone that Ungern-Sternberg (a German) had only been hired because they'd failed to recruit any Dutchman for the job.

By asking a German partner to help, Smits was admitting that Rabobank had dug itself into a very deep hole. Rabobank International had failed in the market and lost serious money; its grand ideas about taking over an international capital markets house had come to nothing. Smits needed a new idea, fast. He caught a flight to Frankfurt and soon found a rapport with Thiemann. "You listen for a couple of hours and say: yes, that's the way," Smits says.

By that time, Smits no longer had many alternatives. Ruined by spendthrift and risk-happy managers in London, Rabo's investment banking activities, which were originally intended to focus on customers in just three sectors, had got totally out of hand.

"With hindsight, [we saw] explosive growth of people and businesses. There was too little focus on our industries," he says. Ambitious managers went beyond their brief, investing huge sums to build a complete new platform based on straight-through processing and recruiting hundreds of highly paid traders. Their job was to generate massive trading volumes on own-account in the belief that this would attract customer flow.

By the end, Smits says, own-account trading had swelled to 80% of trading volume, though "not, unfortunately, 80% of revenues". It may have been even worse than that, given the bank's remarkable admission that only 10% of the investment bank's business was transacted on behalf of customers.

Inevitably, London bankers despised top Rabobankers like Smits' predecessor, Herman Wijffels, who were always more in tune with local Dutch clients; none of the directors has investment-banking experience. "They are a bunch of faceless second-rate guys with a bit of credit background," is a typical London comment.

Yet there is consensus among almost everyone involved - from the Dutchmen in Rabobank's top management to sacked London traders with an axe to grind - that the problems arose because the bank's directors and the investment bankers misunderstood each other. Utrecht made too little effort to explain its strategy to its new recruits and haughtily ignored them as long as they were making money.

The only principles handed down were bizarre and sounded impossibly lenient: "traders will never be sacked as long as they stay within their limits" and "profit is not our primary aim" are two guidelines top management repeated to Euromoney at the time.

"Management in Utrecht was probably not giving much guidance and was not in a position to provide strong, strategic leadership. And a few [in London] were relentlessly, ruthlessly taking advantage of that situation," says Dennis Ziengs, who headed Rabo's operations in North America and then in Hong Kong, and has since joined Deutsche Bank. "The tail was wagging the dog."
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