Abigail with attitude: December 2011
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Abigail with attitude: December 2011

Abigail Hofman



As Christmas draws near, bankers turn their attention to the burning issue of the day: bonuses. This year, however, hope and greed will be tinged with fear. The financial industry is a drowning man being pushed under unrelenting waves by an unseen but malevolent hand. Every so often the industry rises to the surface, tries to gulp some air and regain equanimity, only to be unceremoniously shoved back underneath the ocean.

I am surprised by how many bankers are in denial, and the more senior the banker, the more tightly drawn around their head is the cashmere blanket of denial. The third quarter was terrible for investment banking and the fourth quarter might be as bad. There was a glorious equity rally in October but it disappeared just as most investors started to contemplate dipping a toe back in. "It’s virtually impossible to trade the volatility," moaned one employee of a top fixed-income division.

The ghosts of bonuses past, present and future

Goldman Sachs was the first bank to understand what was happening. In July, the firm announced it would lay off 1,000 people. I wrote in my August column that Goldman is normally ahead of the pack in spotting industry trends. As I had predicted, other banks reluctantly came to the wake and announced dribs and drabs of redundancies. Most of the firms – except for Morgan Stanley – have cut staff in the past few months, but, unfortunately, I fear that the quantum of job cuts might not be enough. A well-placed source mused: "There will probably be another round of job cuts prior to bonuses, then the announcement of low bonuses and more job cuts."

Bank bosses perhaps don’t understand that the good times are over and the door might have shut forever. Cost/income ratios around 70% will no longer be tolerated. Banks might need to raise more capital next year and investors are sulking.

A couple of incidents on strategy and compensation intrigued me. The Financial Times reported that Alison Carnwath, a Barclays non-executive director, recently met some of the bank’s largest shareholders. Carnwath was told politely that investors would not tolerate the payment of large bonuses unless Barclays raised its dividend. The balance between employee compensation and shareholder reward had to change.

UBS held a much-trumpeted investor day in New York on November 17 to set out a new strategy for its investment bank, after the unauthorized trading loss of $2.3 billion. I and other commentators were expecting radical head-count reductions and exits from geographies or businesses.

Instead, we received a limp lettuce leaf: minimal job cuts, on top of those announced earlier in the year; a substantial reduction in risk-weighted assets, but over a five-year period; and the closure of a few businesses. I’m not convinced this is sufficient. Sergio Ermotti and Carsten Kengeter might regret they did not undertake a more brutal reorganization because it might end up being death by a thousand cuts.

UBS’s investment bank will likely be a second-tier player except in certain areas where it is a star – such as Asia or cash equities. I like Kengeter, head of the investment bank and I hear that his presentation at the investor day was well received. However, given the focus of aligning its investment bank with its wealth management business, I don’t see UBS competing head-on anymore with the flow giants, such as JPMorgan, Deutsche, Barclays or even Bank of America. And if that is the case, an investment bank that employs 16,000 people – down from the current 18,000 – is too big. I am so vehement on this point because next year will be an annus horribilis for the real economy and for the banking industry as a whole. Two moles have murmured the unpalatable phrase: "The other shoe will drop."


When things don’t add up, it is important to step back and ask: "Am I missing something or are we in the euphoria of crowds phase?" An obvious cautionary sign is a lot of relatively uninformed people telling you it is different this time. That was the case with the dot-com mania. Overpaid City scribblers, who probably had been in the investment banking business for a mere five years, were insisting such stocks should be valued on a click-per-minute basis rather than revenues or profits. "It’s different this time," was also the mantra with the US housing boom a few years ago.

I was reminded of all this recently when dealing with an ingénue estate agent in London’s prime Notting Hill Gate. She was showing me a well-designed, two-bedroom flat in a shabby building in a drab street. I was told I had to offer more than the asking price of £1.75 million if I wanted to secure the property. "Greeks, Italians and Spaniards are all desperate to buy in London now," Ingénue intoned. "They know it’s a sure store of value."

Can that be correct? Prime London property prices have risen by about 20% in two years. What happens if the favourable, non-domicile tax regime for foreigners changes? What happens if the government imposes a wealth tax on properties over £1 million? What happens if the UK goes into recession, landlords can’t find tenants and liquidate their investments, or over-leveraged owners lose their jobs and are forced to sell their homes? Won’t more supply mean lower prices? I will watch with interest what happens in 2012 and whether prime London real estate does indeed prove to be "a sure store of value".


On the same day, I went from dealing with the over-priced central London property market to mingling with those who are probably opposed to individual property rights. I went to St Paul’s Cathedral in London’s financial district to observe the Occupy London Stock Exchange protesters (see London protests: There goes the neighbourhood Euromoney, November 2011.

I found them in subdued mood. Their tent city had shrivelled to maybe 50 canvas structures and they were holding an open-air meeting to formulate their response to the City of London’s lawsuit to evict them. I had the impression that the group was made up of professional protesters: unemployed and dispossessed; the flotsam and jetsam of a big city. The movement, which began in New York, wanted to highlight issues of economic inequality and corporate greed, but as the weather has worsened the ferocity of the protesters’ outrage has waned. I understand this. After 20 minutes of listening to their open-air debate, I was shivering. I would not have been keen to linger in the unheated, make-shift campsite.

Nevertheless, we should not dismiss the Occupy Wall Street movement. If Europe and the US fall into recession next year, if Western governments decide they have to cut welfare and pension provisions, ordinary people who do have a stake in our capitalist society will also protest. And then the "greed is good", bonus-heavy culture of investment banking might become even more unacceptable.

I do not rule out that things could get nasty. A mole murmured: "I have told senior management if they insist on taking multi-million dollar bonuses this year, they might as well hire a bodyguard because they could end up getting shot." It doesn’t sound like a movie with a happy ending to me.


Last month, the film My Week with Marilyn opened in London. It depicts the brief romance between Marilyn Monroe and a junior on one of her film sets. The junior is played by Eddie Redmayne, who, at 29, looks to be the Laurence Olivier of his generation.

I’ve watched Eddie’s career with interest because many years ago I worked with his father, the redoubtable Richard Redmayne, who is now head of corporate broking at Seymour Pierce, a British stockbroker. Richard was one of the most handsome men in the City, with a sense of style that led one of my female colleagues to gasp: "Richard, you look so glossy, more like a film star than a banker." I guess it’s a case of like father, like son.

I was thinking of relationships as I contemplated recent events at Lloyds. Chief executive António Horta-Osório has taken a leave of absence, after eight months, on the advice of his doctors. The rumour mill is working overtime, but the consensus seems to be that António is suffering from intense fatigue. This is an outcome I never envisaged.

In retrospect, it might be that António’s experience of running one of Santander’s subsidiaries did not equip him well for running a troubled UK banking group. A source mused: "António probably had a call from Santander chairman Emilio Botín each week asking him what he was doing. He might have been more of a puppet than the puppet-master."

I was, however, interested in the view of a top hedge fund manager. I had expected Hedgie, who is responsible for billions of dollars, to be caustic about António’s sabbatical. Instead, Hedgie harrumphed: "If a leader ill or is suffering from stress, they should be allowed to take a break to heal themselves. The best steel is tempered steel." The Lloyds saga raises the fascinating question of where the new generation of bank CEOs will come from and whether they have the experience and temperament to deal with the hostile environment. I will delve deeper in my next column.

Back at Lloyds, the outlook looks cloudy, as judged from the fact the share price is down 65% this year. Chairman Sir Win Bischoff is 70 and must be on the verge of retirement. Tim Tookey, the acting chief executive and former finance director, had resigned before António’s illness to go to an insurance company. Now David Roberts, a non-executive director and former Barclays executive, is in place to take the CEO reins in the new year if Horta-Osório does not return.

But Tookey and Roberts are not names you would conjure if you were looking for someone to take on one of the toughest jobs in banking. Where are the alternatives? One rumour suggests that Mike Geoghegan, the former CEO of HSBC, could be an option. Geoghegan left HSBC a year ago, in another bungled succession, and has since been getting himself in shape. He’s a man who likes a challenge and knows what it takes to be head of a big UK bank. He’s also good friends with Horta-Osório, from their times working in Brazil for HSBC and Santander respectively. If Horta-Osório was to return, then Geoghegan could ascend to the chairman’s role he was not offered at HSBC.

But nothing is straightforward when it comes to Lloyds right now. Nathan Bostock, whom António had recently recruited to join as Lloyds’ head of wholesale, bolted in mid-November to RBS, where he used to be head of risk. I take a dim view of such behaviour, which seems to shriek: "Me, me, me." Bostock showed no loyalty to RBS when he announced his decision to depart for Lloyds in mid-July and no loyalty to Lloyds when he reneged on that decision in late November. A source mused: "I wonder how that works? Bostock must have been on gardening leave from RBS. So does he now just slink back to his desk?"

Anyway, Bostock is a sideshow in this production. Everyone at Euromoney wishes Horta-Osório a speedy recovery.


Let’s pause for a moment on the unedifying saga of MF Global. Jon Corzine was for many years a partner at Goldman Sachs. In fact, he ran the place for several years before it went public in the late 1990s. Corzine’s brilliant career then continued when he entered public life and became one of the senators for and then governor of New Jersey.

In 2010, having been rejected by the electorate for a third term, Corzine became chief executive and chairman of MF Global, a futures brokerage firm. Corzine had ambitions to transform his new organization into a mini-investment bank and hired proprietary traders. The plan unravelled when a $11 billion leveraged position in European sovereign debt and a third-quarter loss led regulators to demand an increase in capital. Ratings agencies downgraded MF and it experienced a classic liquidity drain before filing for bankruptcy at the end of October.

This would be bad enough but much worse is the fact it would appear client funds were commingled with proprietary funds, and more than $1 billion of client funds are now missing. We should criticize MF Global’s senior management and board for this catastrophe, but don’t forget that the regulators, who were meant to oversee the firm, are equally culpable.

Corzine has been called to testify before a congressional committee in mid-December. None of us knows for certain exactly what will be revealed at the hearing. However, I would hazard a guess that Corzine, once one of Wall Street’s finest, is unlikely to run a financial institution again. Unfortunately, he joins the ranks of those princes in his peer group – think Dick Fuld, Stan O’Neal, Chuck Prince and Jimmy Cayne – who fell to earth.


Josef Ackermann, the chief executive of Deutsche Bank

Ackermann became aware that the necessary shareholder votes might not be easy to garner and thus the bank turned course

Josef Ackermann
, the chief executive of Deutsche Bank, has not fallen to earth but he might have tripped over his regal cloak. Amid all the kerfuffle and chaos of the European sovereign debt drama, I almost missed a small announcement that Ackermann would no longer be chairman of the supervisory board, as had been envisaged when it was announced this summer that he would be succeeded in 2012 by co-chief executives Jürgen Fitschen and Anshu Jain. It transpires that in Germany if a chairman of a management board wants to ascend to the chairmanship of the supervisory board, he needs assent from 25% of shareholders prior to winning a majority vote at an annual general meeting.

In mid-November, Deutsche Bank announced: "The extremely challenging conditions on the international financial markets and in the political-regulatory environment demand [Ackermann’s] full attention as the chairman of the bank’s management board. This does not allow enough scope for the many talks with individual shareholders necessary to implement the original plan."

This is odd. It took ages for Deutsche to announce a successor to Ackermann – whose original term was extended – and then they botched things so badly. It is also sad. Ackermann is an excellent banker with strong political and corporate connections. He is held in high regard by those inside and outside the industry. His departure is a loss for Deutsche. It seems likely that Ackermann became aware that the necessary shareholder votes might not be easy to garner and thus the bank turned course.

Meanwhile, Paul Achleitner, an Allianz board member, has been nominated to chair Deutsche’s supervisory board from May. This also strikes me as bizarre. Surely someone who knows Deutsche Bank would have been preferable? Could they not find one board member who could step up into this role? And don’t forget that Achleitner, Allianz’s management board member for finance, must have been partially responsible for the insurer’s decision to purchase Dresdner Bank in 2001. This proved to be an unmitigated disaster and the nightmare only ended when Dresdner was bundled unceremoniously out the door in 2008 to become Commerzbank’s headache.

Finally, did anyone apart from me notice the bad Deutsche investment banking third-quarter results? The corporate banking and securities division announced a 95% dive in year-on-year pre-tax profits and made only €70 million. Obviously, the whole industry under-performed but it is disappointing that Deutsche was not an exception. No one is yet impugning Deutsche’s status as a flow monster but I will be interested to see the fourth quarter investment banking results and who Anshu will appoint to run this area.

As this is my final column for the year, I wish all my readers a peaceful festive season and a prosperous new year. May 2012 be much better than I am expecting.

Please send news and views to abigail@euromoney.com

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