Abigail Hofman: End of the Pru party

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Abigail Hofman
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The demise of the Prudential deal together with inhospitable debt and equity markets implies that the second-quarter numbers for global investment banks will be bad.

Abigail's biography
They talked a lot about the man from the Pru when I was in New York in early June. The UK insurance company’s audacious bid for the Asian business of AIG had skidded off the runway and imploded. When the deal was announced in early March 2010, I was sceptical. For me it was a bull-market trade in an environment priced for perfection. I wrote: “Credit Suisse, for the time being, looks canny and smart. But if market conditions collapse, Credit Suisse could end up crestfallen and sobbing. Who can predict the future?” Credit Suisse was the lead M&A adviser to Prudential and played a large part in structuring the transaction. But many other banks leapt on the bandwagon: HSBC and JPMorgan underwrote the financing together with Credit Suisse. Citi, Goldman Sachs, Lazard, Nomura and Ondra also provided advice on the transaction. The fees paid by Prudential would have amounted to more than $1 billion. Since Lehman went bankrupt, corporate M&A has offered lean pickings for advisers although restructuring work has provided an opportunity for those firms smart enough to staff up in this area when the good times rolled. The demise of the Prudential deal means a loss of revenue for the firms involved even though substantial fees had already been banked – I estimate some £200 million ($300 million). The end of the Pru party together with inhospitable debt and equity markets implies that the second-quarter numbers for global investment banks will be bad. It will be interesting to see which firms avoid the worst of the tempest. We know that some of the smartest hedge funds were down 7% to 10% in May. It is likely that banks with large proprietary trading operations will have suffered as well.

So how were senior people on Wall Street feeling during this period of volatility? In general, I was surprised at how positive senior bankers were. There is a sense that the most heinous horrors are in the rear-view mirror. Everyone feels good to have survived. Brian Moynihan, chief executive of Bank of America, chided me for being too pessimistic. Ken Moelis, founder of Moelis & Co, (I’ve always wanted to meet someone who had their name over the door) was almost ebullient. He talked about the growth of his company and the value clients place on unbiased advice from a professional who is prepared to say: “No, this is not the right deal for you to do now.” Moelis & Co recently acted for the special committee of GLG’s board of directors when the hedge fund was acquired by Man Group. And Ed Forst, co-head of Goldman’s investment management division, displayed admirable composure despite market pyrotechnics. A source outside the firm murmurs: “Ed is highly competent. I see him as one of the contenders who could eventually replace Blankfein.”

Morgan Stanley’s New York headquarters are at 1585 Broadway, which is in the tourist-thronged Times Square neighbourhood. This plebeian backdrop is an interesting juxtaposition with the firm’s patrician pedigree. Morgan Stanley teetered on the edge of a precipice in September 2008 when, like other broker-dealers, it faced a panic-induced liquidity crisis. The firm survived but the experience left an indelible impression on senior management. Today Stanley is, in a way, recreating itself. This is not an easy task for new chief executive James Gorman and his team given the unrelenting public hostility to banks and the difficult market conditions. It was lovely to see Greg Fleming, the recently appointed president of investment management and global research. I consider Greg a friend and despite the relatively short time we have known each other (four years), the startling events we have witnessed have created a remarkable bond. Greg was formerly co-president of Merrill Lynch in its heady heyday and then as the downward spiral began and the flames were engulfing the ground floor of the building, Greg pushed chief executive John Thain to sell the firm to Bank of America. I also met with Colm Kelleher, co-president of Morgan Stanley’s institutional securities’ business and Jack DiMaio, global head of interest rates, credit and currency. Jack became famous in the 1990s as one of the top traders at CSFB and was a key part of the 40-person team (along with John Walsh, Ben Cohen and Nasser Ahmad) that Bob Diamond tried to hire at Barclays Capital in the spring of 2001. The team was bid back by an aghast Stephen Hester, CSFB’s head of fixed income at the time, who allegedly offered hefty guaranteed bonuses as well as a future share of the revenues of the US fixed-income business. 

More from Abigail: 

Abigail Hofman: End of the Pru party

Abigail Hofman: Progress at Citi
Vikram Pandit has taken Citi from a place where the institution was written off as a basket case to being a share beloved by star hedge fund managers and widely seen as a buy for widows’ and orphans’ pension pots.

Abigail Hofman: Nomura drama
“Nomura was in a strategic corner: they were trapped in Japan. They bought the Lehman operations for virtually nothing. If I criticize the Japanese for anything – it is that they are not involved enough in the investment banking business."

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