Abigail Hofman: Excess and the city
I warned that excess and the city was back. As a contrarian, I feared that the liquidity bubble which cocooned us might be about to burst. As I write in mid-May, the tempo of the music is more sombre. Oil gushes unrelentingly into the Mexican Gulf, threatening fishermen and fauna alike, volcanic ash hovers over Europe and banks are mired in a cesspit of litigation and investigation arising from their former sins.
I used to be a banker specializing in bond origination for sovereign and supranational clients. When Greece became the word most bandied about in financial circles in early 2010, I started to ponder my previous experiences. After all, I had been closely involved in many discussions with European treasury officials before the introduction of the euro currency. Regular readers realize that I am a curmudgeonly Cassandra who rarely believes anything she is told. In 1999, I struggled with the concept of one currency fits all. But the zeal of the officials involved in the implementation of the single currency was extraordinary. I was reproved for my lack of vision and inadequate understanding of the new dawn that would usher in an enormous, business-friendly, tariff-free trading zone. Questions about what might happen if the union stumbled during lean economic times were met with rolling of the eyes and sighs of: "Abigail, please don’t be so cynical."
I spent some time in the US in late January and most financial commentators were expecting the Greek issue to be sorted out in a weekend in much the same way that Treasury secretary Henry Paulson had dealt with the problem banks in 2008. I knew this would never happen: too many people had to be consulted, too many vested interests were involved. As winter faded and spring unfurled, I was surprised at how resilient the euro was. It slipped by a mere 4% ($1.37 to $1.32) between early February and early May 2010 despite constant chatter regarding a Greek default.
In early May, I had lunch with a senior trader at a big investment bank. I discussed the relative strength of the euro with him and received my answer. Apparently, some sovereign wealth funds had been purchasing the euro as a diversification from the dollar: on the basis that they were in a position to be long-term holders of the euro. This worried me. First, an entry point of $1.33 a euro is not a bargain. In 2001, the euro was much weaker. Secondly, sovereign wealth funds often get it wrong. Remember how in 2007 and early 2008 they tap-danced on to the scene to recapitalize some of the European and US banks. I sometimes wonder if buy high, sell low is their motto. China Investment Corporation’s participation in the Blackstone IPO during June 2007 marks the absolute peak of the debt-worshipping frenzy. Singapore’s Temasek bought more than 2% of Barclays’ share capital in August 2007 at a princely price of £7.20: the current Barclays share price is a paltry £3. In the 10 days following my lunch with senior trader, the euro fell 6% against the dollar in a rout that was starting to appear disorderly.
I have a dark suspicion that it might be tears before bedtime. An impeccable source pointed out that it might be more convenient for Greece to default on its debt obligations rather than soldier on with wrenching austerity measures. Ejection from the euro is an unappetizing option as Greece will then have to repay euro-denominated debt in devalued drachma. It seems as if the fierce forces of the markets – the hedge funds – agree with me. The share prices of big European banks have been gyrating like puppets on a string. Banco Santander shares rallied 20% after European leaders ushered in a €750 billion emergency funding package on Monday May 10. Such a gravity-defying pirouette tells me big players were short the stock. Can it be true, as one mole whispers, that a highly respected US bank chief executive has given orders to remove the lines to Spain? I also heard that a top trader at a European bank wanted to buy a substantial amount of Spanish government bonds but was refused permission by his credit department. None of this bodes well.
Amidst market mayhem, I wonder how bankers are being received in European capitals? Are these money men welcomed as heroes who can uncover the marginal investor and orchestrate flawless bond auctions? Or are the financiers considered a necessary evil? At every twist and turn of the rocky path to Europe’s ruin, mercenary, mercurial bankers, some might say, seek to protect the interests of their own firms in general and their individual bonuses in particular. My sources are tight-lipped on this topic although they highlight that there remains a symbiotic relationship between banker and borrower. European sovereigns have huge budget deficits to fund and need strong banks to trade and distribute their paper. Bankers might grumble about the thin margins on vanilla sovereign debt offerings but they still welcome the profile and flow information that such business begets. At the coalface, in government debt agencies, bankers are greeted cordially. However in the public arena bankers and bountiful bonuses are berated. Indeed, a bank chief executive speaking at a recent off-site told his senior management that governments, all over the world, were now implacably hostile to bankers and that he could not see this changing.
Is Meissner the right man for Merrill? Under his tenure, investment banking at Nomura did not make much progress: Nomura is embarrassingly absent from the European ECM, DCM and M&A league tables for 2009. A mole mutters that the Nomura platform was difficult to pitch to European clients, who needed time to feel comfortable with the Japanese firm’s offering, and that the corporate finance effort took time to rebuild after the Lehman bankruptcy. Meissner is not renowned for his powerful client relationships but is viewed as someone who can build a business. One might ask why Merrill felt the need to go outside the firm to fill this leadership position. A source whispers that Meissner is very organized and will bring discipline to Merrill’s European investment banking practice. I am always prepared to give change a chance and Merrill has certainly lost too many senior bankers in the past year. Let’s hope Meissner can turn the tide.
I wonder what Andrea Orcel makes of these new developments. Orcel was previously Bank of America Merrill Lynch’s executive chairman of global banking and markets, which was a sideways move following the post which he held, before the merger, as Merrill’s head of global origination. Orcel has strong relationships with some of the big European financial institutions so one might have expected new boy Meissner and old hand Orcel to tumble over each other. However, a press release in late April hints at a confusing compromise. Orcel adds Latin America, central and eastern Europe, the Middle East and Africa to his responsibilities. These regions were previously part of Jonathan Moulds’ portfolio, whose main focus was regional responsibility for Europe. Moulds now becomes president of Europe and Canada. Will this new senior management line-up gel harmoniously or will there be dissonance on deck the good ship Bank of America? I will be watching closely.
In contrast, Morgan Stanley has a cohesive senior management team. In the past year, there has not been significant turnover at the top and a bloody battle for the chief executive throne was avoided with a seamless transfer of power from John Mack to James Gorman in January 2010. Stanley is a work in progress. Gorman wants to reorient the business with a greater focus on retail wealth management (through the joint venture with Smith Barney) and improve results from fixed-income trading.
I was invited to Morgan Stanley’s London press party in May and met many of the senior executives, including Rob Rooney, head of interest rate, credit and currency sales, and Simon Robey, head of Morgan Stanley UK. I also chatted with my two favourite Morgan Stanley bankers: Colm Kelleher, co-president of institutional securities and Franck Petitgas, co-head of global investment banking. Colm is unusual for a senior banker in that he is ferociously bright but doesn’t take himself seriously. Franck is charm personified. Some criticize Morgan Stanley for not recruiting more outsiders to their investment banking area. I do not agree. Stanley has embarked on a big recruitment drive, under former Credit Suisse star Jack DiMaio, to fix its fixed-income and flow-trading businesses. Stability of personnel and culture in its corporate finance team might not be such a bad thing.
All of these experienced hands report in to the relatively youthful Carsten Kengeter, the co-CEO of the investment bank.
Is UBS sensible in placing a premium on experience or is it starting to resemble a grazing pasture for tired donkeys? "You need seasoned guys," a source explained. "Otherwise, you end up with a trading floor full of 30-year-olds." First-quarter 2010 results in the investment bank were good. If this trend continues, my pasture analogy might prove superfluous.
During the past year there has been a trend for asset managers to consolidate. The old adage that asset management was a great earnings diversification for banks proved to be wrong during the last crisis. The poster child for this new asset-gathering conglomeration is BlackRock, which last year hoovered up Barclays Global Investors. I was nevertheless puzzled when in mid-May listed hedge fund manager Man Group announced that it intended to buy London–based hedge fund GLG Partners for approximately $1.6 billion. This deal should make Man one of the world’s largest alternative investment-managers, with more than $60 billion under management.
Man has been suffering lately: its flagship fund, AHL, has underperformed and its share price has been poor. AHL uses computer programs to identify trends but some snipe that it is a "black box". GLG also seems to have lost its way: it suffered badly, like most hedge funds, in the global unravelling of late 2008. In 2008, GLG also lost its star trader, Greg Coffey, who ran its successful emerging market funds. "Those GLG guys are so smart," a mole murmurs admiringly. "I guess they are cashing in now because they are worried about the implications of more regulation on their profitability."
GLG announced a New York listing at the top of the market in June 2007. This reverse acquisition by Freedom Acquisition Holdings valued GLG at $3.4 billion. At the time, I warned readers not to buy the shares, which were trading at more than $10. Three years and a takeover bid later, investors will receive $4.50 a share in cash. That is a truly terrible return. To be fair, GLG principals own acres of GLG stock and will have to endure a three-year lock-up, so they have suffered alongside outsiders. Nevertheless, I still don’t understand the rationale for the transaction: Man diversifies its business from AHL but is paying a hefty price (20 times 2009 earnings) for a volatile business. GLG made a loss in the first quarter of 2010. GLG, by eagerly embracing a bigger partner, surrenders its elite identity and culture. Moreover, the deal fails to solve a big problem for each party: their lack of US distribution and muscle. I worry that the GLG-Man marriage might mean another market peak in the same way that the GLG flotation was a market top. Buyers beware!
Finally, I see that HSBC has reshuffled some of its senior bankers. Russell Julius is promoted to run global banking in Asia and Patrick Nolan is appointed head of global banking and markets for the Americas. A source opines: "It is an interesting time to be in America for HSBC: the disastrous acquisition of consumer lender Household Finance seems to have turned the corner. HSBC Americas should be profitable in 2010." HSBC continues to be a dependable organization that rarely produces unpleasant surprises. I recently had lunch with Stuart Gulliver, who runs HSBC in Europe and the Middle East as well as heading the investment bank. Everything was off the record so I cannot reveal what we discussed. However, I can tell you that Gulliver is a delightful luncheon companion: amusing, articulate and analytical.
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