I am reminded of the Greenspan era when policymakers fuelled one bubble after another. By cutting interest rates so savagely, central banks have created a liquidity lunacy that will end badly. Let’s hope we’re not the susceptible fools left holding the parcel when the music stops.
It’s important to recognize when things are too good to be true. Once you start to feel an overweening confidence mingled with complacency, sell everything and run for the hills. During the first half of 2007, most financial commentators insisted that London was about to replace New York as the pre-eminent global financial centre. I never agreed with this view. Three years later, London is grey and grim, New York is still the momentum metropolis and everyone is talking about Hong Kong as the new, key financial hub.
Lackluster LSE
The London Stock Exchange is a symbol of this decline. When London was the purported financial centre of choice, foreign exchanges were lining up to purchase the LSE. Deutsche Börse, Euronext and Nasdaq all came calling. But chief executive Clara Furse kept insisting that the suitors were undervaluing her precious jewel. Furse cobbled together a deal with Borsa Italiana and several Arab shareholders in 2007. Although I am normally very supportive of senior women in finance, I am not a fan of Furse. She did a mediocre long-term job for investors and, like many others caught up in their own press-relations bubble, failed to sell at the top. Furse received a damehood and shareholders shuddered as the share price shrivelled. Furse handed over to former Lehman banker Xavier Rolet in mid-2009. She now drifts around in the ether as a highly regarded non-executive director although as far as I am concerned she has limited vision. I noted that in June 2008, Furse bought more than 30,000 London Stock Exchange shares. While insiders generally have a poor track record of share dealing, Furse’s purchase, just before the wheels fell off the financial wagon, looks particularly inept.
Xavier Rolet faces a tricky task sorting out Furse’s legacy. The exchange has inadequate technology, evidenced by the breakdown of its systems in late November, and faces fierce competition from upstart multilateral trading facilities such as Chi-X, Turquoise and BATS Europe. I hear good things about Rolet. I look forward to meeting him and hearing about his plans for the future.
RBS's rocky road
Another symbol of London’s former financial glory is Royal Bank of Scotland. RBS used to be run by the arrogant and swashbuckling Sir Fred Goodwin. Come to think of it, the UK has a poor record of proffering titles to financial titans who then turn out to be tarnished dwarfs. I am worried about RBS, which is now 84% owned by the state and run by former Credit Suisse banker Stephen Hester. The global banking and markets division, which in 2007 accounted for some 35% of the bank’s profits, could experience a staff exodus. Indeed, there has been a trickle of resignations before bonuses have even been announced. Hester has talked about the bank walking a tightrope as it attempts to retain and hire bankers under government ownership. I understand that senior management is keen to pay key people competitively in order to protect the value of the taxpayers’ investment. A source talks about, "drawing on every sinew of trust with employees".
I recently met John Hourican, head of RBS’s markets-focused investment bank. I like Hourican immensely. He is unpretentious, straight-talking and has a good sense of humour. Hourican has a reputation for being a king of detail. It does not surprise me therefore that he qualified as an accountant. "I’m forensic about what I don’t know," he told me with a chuckle. Chief executive Hester and his new team need to transform RBS from a highly leveraged acquisition machine to a bank that focuses on organic growth. However, RBS will continue to have a global orientation. The investment bank is represented in 39 countries and RBS has a significant US retail and commercial presence following the acquisition of Citizens which, as of June 30 2009, was the ninth-largest US bank by branches.
Everything I hear about Stephen Hester makes me think that he is a steely soul who might be able to sort out the RBS mess. However, the road ahead will be rocky and Hester will need good henchmen like Hourican at his side. At the moment, the institution resembles a punchbag for Neelie Kroes, the outgoing European Union competition commissioner, and Alistair Darling, the British chancellor of the exchequer, to hit when they are having a bad day. It would be more constructive to organize a public flogging of culpable Fred Goodwin, together with close adviser Matthew Greenburgh of Merrill Lynch, and let the new management run RBS without meddling from ignorant politicians.
Who's who at UBS
I have always believed it is better to be lucky than smart. Rob Jolliffe used to be the global head of debt capital markets at RBS. He left in December 2007, citing personal reasons. Perhaps Rob realized that the acquisition of ABN Amro was the Trojan Horse that would topple the Scottish empire. Jolliffe has now resurfaced at Swiss bank UBS. I have not written about UBS in detail since the firm persuaded Oswald Grübel, the former head of Credit Suisse, to quit the golf course and return to the turbulent seas of high finance. I never had any doubts that Ossi would succeed in turning the tide. And in the 10 months that he has been in charge, Grübel has achieved a lot: stabilizing and de-risking the business. The bank reported an operating profit for both the second and third quarters of 2009. Capital ratios and morale have improved: the firm is able to attract good staff once again. Indeed, rumours won’t go away that Bill Winters, ex co-head of investment banking, is considering a senior role at UBS.
