If any Hollywood producer decides to make a farce about Financial markets, he might want to give Chip Kruger and Gary Holloway a call.
These two have been pawns in NatWest’s soap-opera saga of buying into investment banking, selling out of most of it less than three years later, and then using what was left as a Financial punchbag in a desperate attempt to avoid falling prey to a hostile bid from one of two Scottish banks.
They were the co-CEOs of US boutique Greenwich Capital, bought by the UK bank in 1996 as just one of several largely doomed investment-banking investments. After an equity derivatives loss of £90 million in March 1997, NatWest reviewed and dumped its strategy.
Kruger was promoted to run the old NatWest Markets, which was broken up and sold off.
Only the bank’s debt businesses remained.
Kruger and Holloway had convinced the board to let them try to resurrect some pride.
And profit.
For a year, that entailed bearing the brunt of the criticisms for the previous failures which they had nothing to do with – including a registered loss for the investment-banking division of $1 billion in 1997. But the NatWest board had been convinced by their plan to move from a loss-making division to profitability and a 17.5% return on equity by the end of 2000. Kruger and Holloway hoped to do this by instilling the Greenwich culture – be a boutique, but be the best in the chosen Welds, and, of course, dress down.
It worked too well. The US operations had been making most of the money, but during the fourth quarter that began to change and the revenue mix was more 50% from the US, 50% from elsewhere. Greenwich hit profitability a year early, making £243 million in 1999, which gave it an RoE of 24% in management accounts, 18% published.
By this stage Greenwich had already become a political football, being kicked around by the three competing parties for winning control of the bank. After Bank of Scotland and then Royal Bank of Scotland stated that they would look to sell at least the US operations of Greenwich NatWest, NatWest countered with a plan to dump the whole thing if necessary.
Internally, bankers at Greenwich put this down to over-enthusiasm on the part of Dresdner Kleinwort Benson, one of NatWest’s advisers along with JP Morgan and also to NatWest’s Finance director, Richard Delbridge.
Kruger and Holloway opened up discussions with other potential bidders. “We had several bidders who were extremely interested,” says Kruger. “They each had different strategic needs, were initially limited to being able only to buy Greenwich Capital in the US, but increasingly felt, as did we, that they could successfully bid for parts of the European operations were NatWest to retain its independence.”
For a while it looked as if Kruger and Holloway would be jumping ship again and taking their profitable little operation to another institution. So what went wrong? They made too much money. At £243 million Greenwich’s profits now made up over 10% of the group’s profits for the year, which meant that no sale could be concluded without the approval of the shareholders: now Royal Bank of Scotland.
There was still a chance of a sale. RBS had stated that the US operations would be sold.
This would not have been the cleverest move, since the US had been the driving force behind the rehabilitation of NatWest’s investment bank and the reason why many bankers had joined up in London. In February, it looked as if RBS might be stretched on its tier-one capital and be forced to sell Greenwich US and possibly even more to raise enough money.
A good price for Gartmore, the asset management arm of NatWest, helped out there, and then the Scots made an about-turn at the end of March. After reviewing the Greenwich NatWest operations as a whole, they saw the light and decided to keep it all.
But they have chosen not to run it in the way that Kruger and Holloway had since Greenwich was First set up in 1981. This was as a boutique which should be able to compete with the major players in niche areas. “In our chosen Welds we run head-to-head with Goldman Sachs, Morgan Stanley and any other major players,” says Kruger, “such as in the mortgages business, or in US treasuries, where we’re the most profitable on the street.”
But RBS wants an investment-banking unit which is more an adjunct to its corporate banking activities. So it is combining Greenwich NatWest’s UK and European operations with its own small capital-markets activities. Also being brought into the unit is NatWest’s foreign exchange and treasury operation, global Financial markets. This was split off from the investment bank in 1997, although its CEO, Stephan Harris, and the co-CEOs of Greenwich had cooperated closely and a re-merger had been talked about.
Greenwich Capital in the US is to be retained now that RBS has recognized that it’s probably the most important piece of the puzzle. It is to be ring-fenced and run as a separate unit, and will report to Brian Crowe, managing director of Financial markets.
Kruger will leave in mid-April, although he’ll stay in the UK until the summer, as he has children in school there; and Holloway will stay on until the end of the year in the US.
Somewhat surprisingly, Kruger doesn’t seem to be bitter. “The Scots have great intentions, good self-confidence, and are honourable,” he says, referring to the bankers at RBS rather than all six million Scots. “And they’ve proved by retaining the US operation that they can make quick decisions and remedy mistakes they made.”
So why has he decided to leave? “Because my vision of investment banking is different to theirs. There’s nothing wrong with a strategy which makes it just an adjunct to corporate banking, but it’s not the strategy I want to be part of.”
The danger for RBS is that many of the bankers in Europe might feel the same way. Crowe accompanied Kruger onto the trading Floor last month to tell the bankers the news that he was leaving. Kruger got a standing ovation, and Crowe is unlikely to misinterpret the message.
