Is boring the new sexy? A long time ago, or so it seems, opaque was opalescent. Do you remember how, in early 2007, we marvelled at the alphabet soup of products banks were cooking up? As outsiders, we might have wrinkled our nose at such terms as CDOs, CLOs, SIVs, conduits and warehouses, but we knew bankers were much cleverer than the rest of us (they were paid so much more after all), so these creations had to be good things. To mere mortals, complex banking was creative, canny and above all glamorous, while the shadowy world of hedge funds and private equity was glamour squared.
Today, mired in recession, with the US unemployment rate hovering at 8%, the US stock market down 50% from its October 2007 peak, and write-downs in the global financial sector estimated at a trillion dollars, we now realize that CDO was either short for ‘can detonate ominously’ or an anagram for ‘cart of dung’.
A more frugal future looms, one where simple is the new sane. And it was in this context that I went to meet António Horta Osório. António is the Portuguese chief executive of Abbey National, now wholly owned by the Spanish financial group Santander. Abbey is having a good war, doing what you are meant to do in lean times: purchase assets cheaply. Last year, Abbey acquired the branch network of troubled mortgage lender Bradford & Bingley as well as the whole of another UK bank, Alliance & Leicester. In 2008, on a net basis, Abbey wrote one in three mortgages in the UK. Profit before tax increased by 20% in 2008 to £996 million and Abbey doubled retail net deposits to £5.6 billion. In a world where wholesale funding is hard to obtain, sticky retail deposits are the caviar of a banker’s diet.
Abbey is doing something simple: it is borrowing money from ordinary people, lending it to ordinary people and doing so prudently. Customer deposit growth increased 16% year on year, while customer asset growth increased by a more modest 10%. The loan-to-value ratio of Abbey’s £110 billion mortgage portfolio is a reasonable 50%. Hang on a minute, isn’t that what old-fashioned banking used to be about – boring things like prudence, limiting risk and focusing on core competencies? When did we forget the basics of banking?
Oh and by the way, António, who joined the Santander Group in 1993, has film-star good looks, a dry sense of humour and is delightful company. In an ironic postscript, Abbey’s chief financial officer, Nathan Bostock, recently resigned to join RBS as its head of restructuring and risk. At RBS, Nathan will be reunited with former Abbey colleague Stephen Hester. Hester was the chief operating officer for Abbey National before it was sold to Santander and is now the CEO of RBS.
I hear mixed things about Hester. “Competent but arrogant,” a mole mouths. Another source demurs: “Hester grew up in the tough-knocks school of investment banking. He doesn’t do fluffy. But is he the right person to turn round RBS? Absolutely.”
The upside for Mr Hester at RBS is not clear to me. Why would anyone want to become a civil servant (now the UK government has a majority stake in RBS), clean up after Fred the Shred, endure rigorous public scrutiny and be paid not very much money for doing all of this? Time will tell if RBS springs agilely from the muddy swamp it finds itself in or sinks deeper into the murky muck.
Stephen Hester spent the early years of his career at CSFB, Credit Suisse’s investment bank. It is common to talk about the tentacles and power of the Goldman Sachs and McKinsey alumni network. But perhaps we should talk more about the Credit Suisse diaspora. I was prompted to think about this by the appointment in late February of Credit Suisse’s former chief executive, Oswald Grübel, to head UBS. In fact, the financial terrain is littered with refugees from Credit Suisse who are now in positions of power. There are: Bob Diamond and Hans-Joerg Rudloff at Barclays, Hector Sants at the Financial Services Authority, Alan Howard running top hedge fund Brevan Howard, John Mack and Walid Chammah at Morgan Stanley, Josef Ackermann at Deutsche, David Reid-Scott at Hawkpoint, Michel de Carvalho at Citi, Carlo Calabria at Merrill Lynch, Larry Fink at BlackRock, Bruce Wasserstein at Lazard, Joe Perella at Perella Weinberg and Tony James at Blackstone. And I have a feeling that is only the tip of the iceberg. So a word of warning to all you Credit Suisse minions: be very nice to your colleagues because you never know where they might turn up next!
I return to my theme of boring being the new interesting. Right on cue, I received an invitation to meet Karen Peetz. Karen is head of one of Bank of New York/Mellon’s three global divisions – financial markets and treasury services – and is responsible for approximately one-third of the bank’s revenue.
I have to admit that in the old days my eyes glazed over when someone mentioned the Bank of New York. I vaguely associated it with back-office functions and custody services. But in this new sackcloth and ashes era, back to basics is good – why else are we told to buy utility and consumer staple stocks in a bear market? I determined to look more closely at BoNY/M.
The bank has $20.2 trillion in assets under custody and administration and processes $1.8 trillion in global payments. The bank clears over 50% of all US government securities. Last year, it had a return on tangible common equity of 21%, net income of $1.4 billion and a tier 1 capital ratio of 13.3%. The current market capitalization is around $28 billion (compared with Citi’s market cap of $14 billion). Last year, the bank wrote down $1.6 billion on its investment securities portfolio, which I find disappointing, but that level of write-downs is meagre compared with other financial firms.
Karen is one of only two women on the firm’s executive committee and strikes you as straightforward, highly competent and very nice. She is responsible for the firm’s relationship with the Federal Reserve, and the bank has been working with the Fed to structure the Tarp and Talf programs. In finance, the top layer of senior women has been drastically reduced: Zoe Cruz of Morgan Stanley, Sallie Krawcheck of Citi, Erin Callan (see below) as well as Rosemary Berkery of Merrill Lynch are no longer at their desks. I am therefore delighted to have discovered Karen. I will be watching her career trajectory with interest.
Of course, if you are powerful and pre-eminent in finance at the moment, you are faced with a dilemma: how to manage your profile during a period when bankers are viewed as a lowly form of pond life who eat their own offspring. “Look, any public attempt at damage limitation is pointless,” a senior banker says. “You can’t win sympathy as a fat cat.”
Most bankers have an ambiguous relationship with the press. There is a craving for recognition on a broader stage as well as a deep-seated distrust of the intermediary (the journalist). I’ve noticed that some bankers are excellent with the press, confident and interesting with an ability to spark story lines or provide pithy sound bites. Others are faltering and pompous. One senior UBS banker who I sat next to at a dinner complained to his in-house corporate communications colleague that he had not been seated “with his peers”. Recently, a London-based financial institutions specialist spoke to a newspaper on condition that neither he nor his firm’s name was mentioned. The anonymous banker completely alienated the journalist, who headed the article: “Sorry is still the hardest word for the City’s slickest.” The disenchanted journalist gave a detailed physical description of the anonymous interviewee so that anyone in the know would know to whom he referred.
Is it any wonder that there is a backlash? And as public revulsion pushes the press Rottweilers to be ever more strident, bankers are in a no-win situation. As I am writing, the US financial industry is in uproar. The House of Representatives has passed a bill for a retroactive 90% tax surcharge on the bonuses of bankers who work for firms that have received at least $5 billion in government funds. “None of these senior bankers or hedge fund guys can believe what is going on,” a mole told me. “Remember, many Wall Street chief executives supported Obama and gave money to his election campaign.”
Bankers are suffering but lawyers are prospering. You heard it here first – the litigation that is going to engulf the financial industry will be of titanic proportions and could endure for the next decade. In February 2009, it was announced that Erin Callan, Lehman’s former chief financial officer, was taking “personal leave of absence” from Credit Suisse, the firm she had joined some five months before. At a time like this when a job is the biggest bonus on Wall Street, I was surprised that Ms Callan had made such a move. I assumed that she needed to put some distance between herself and Wall Street and breathe unpolluted air for a while.
But will the stench of the past pervade her period of rest? Callan was Lehman’s CFO from December 1 2007 until June 2008. She thus had substantial responsibilities under the US Sarbanes-Oxley legislation, which requires each chief executive and CFO of a public company to certify that periodic reports containing financial statements comply with securities laws. Violation of these obligations can lead to sizeable fines and imprisonment. Several lawsuits (including a consolidated securities class action in which Callan is a named defendant) have already been filed against Lehman Brothers Holdings and former Lehman executives. The demise of Lehman Brothers is also being investigated by a number of grand juries, which weigh the evidence in relation to criminal proceedings.
Can you imagine the stress and the expense of being caught up in such a process? Of course, directors’ and officers’ liability insurance might cover some of the costs associated with litigation but where many claims are made, as with Lehman, directors might become nervous. “It is inconceivable a firm would have unlimited cover,” a source explains. I spoke with a leading expert in the field of D&O insurance who told me: “D&O insurance is on a claims-made basis. So cover will be available for claims arising during the policy period.” However, if a claim were made after the policy has expired or lapsed (as might be the case in a bankruptcy), there would be no cover. “The breadth of cover varies considerably,” the expert added. “No two policies are the same.” Note from the Abigail with attitude column – any senior banker who is not familiar with the exact terms of his firm’s D&O insurance policy is laughing in the face of impending disaster.
Callan is the tip of the iceberg. All financial executive officers and board members should be very nervous. I was intrigued to see that Nelson Chai, Merrill’s former CFO, who resigned in early February, did not sign Merrill Lynch’s 10K annual report, which was filed on February 24. Instead that burden fell to Neil Cotty and Brian Moynihan, Bank of America officials. The time-line means that essentially Chai left Merrill before the filing date but, in today’s hostile environment, no amount of money could induce me to work as a CFO at a US financial institution.
Forty-nine–year-old Jon Winkelried, the co-president and co-chief operating officer of Goldman Sachs, is another of the dear departed. In February, it was announced that Winkelried was retiring from the firm. Goldman Sachs says that Winkelried looks forward to spending time with his family and meeting his commitments on various boards but did not give a reason for his departure. Various explanations are circulating, however. One version is that Winkelried wanted to leave last summer but stayed on to help the firm through a difficult period.
A mole mouthed that the glamour of Wall Street had faded for Winkelried. He found that coming in to the office to preside over another round of redundancies had limited appeal. Another source ponders whether or not Winkelried might have enjoyed too lavish a lifestyle in the good times. Winkelried owns a ranch in Colorado, has expensive taste in horses and is a keen “cutter” – a cowboy-inspired sport where riders have to separate a calf from the herd. Now he’s cut his ties with Goldman.
Winkelried’s estate in Nantucket is on the market. In fact, it has been on the market since last October and the price has been slashed by 30%, according to the Wall Street Journal, from $55 million to a more modest $38 million. That price reduction might hint at a need to sell. Whatever the exact reason for Jon’s retirement, he would not be the only financier to find that his net wealth has shrunk. Those who did not or could not sell their financial shares now realize that they might have to wait a decade before the former highs are achieved. A senior Barclays executive told me: “It was surreal to watch the stock that traded at £7.80 collapse to 50 pence within 24 months.” But those who are in desperate straits are those who leveraged up. It now turns out that certain optimistic souls borrowed against their bank shares to buy other assets. As the share price fell, margin requirements kicked in and, in bad times, it can be tough to unload desirable assets at a desirable price. A mole highlights one London banker who borrowed against stock and purchased an £8 million mansion. Now the trade is unravelling. “You have to ask,” Mole said, “is this poor soul really able to focus on his job at the moment?” Never has the term nouveau pauvre had such resonance.
What do you think? And how was your month? Send news and views to abigail@euromoney.com
