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Opinion

Abigail with attitude

Somehow, we seem to be back in the TMT era. Do you even remember what those initials stood for? Think telecoms, media, technology, and dial back 12 years to the dot-com mania and the 3G auctions for mobile phone licences. In mid-October, the BlackBerry email network went down for several days, causing consternation to most financiers. For several years now, the BlackBerry has been seen as uncool. "A device for boring old men," one teenager sniffed. But I should point out that the London rioters planned their nocturnal activities using BlackBerry’s free messaging service.

The BlackBerry crumble, as they’re calling the hiatus, presumably means that the Apple iPhone will gain ground as a business tool. One senior banker wailed: "I’m on a business trip in the States and I have no access to email. That means, when I return, I will need to read at least 1,500 emails. It’s unbearable."

I made soothing noises but inside I felt smug. I changed my BlackBerry for an iPhone more than a year ago. The Abigail with attitude column is always ahead of the curve.

So that’s your technology nugget, but the media story I unveil below is causing nearly as much discussion. An ‘empty interview’ occurred in the German Handelsblatt newspaper. BNP Paribas’ chief executive Baudouin Prot did an on-the-record interview with the banking editor but then insisted on revising his answers.

Irritated by this interference, the paper published the interview without the answers. I’m not sure this shows Monsieur Prot in his best light – he certainly doesn’t come across as a ‘master of the universe’ if he has nothing to say for himself.

But in a way, the empty interview proves that freedom of the press is still alive, despite the dictates of big business.

I recently had lunch with a charming mole at the Savoy Grill, which used to be a legendary meeting place for the power crowd. It has now been refurbished and is run by Gordon Ramsay. To me, the crowd seemed less powerful: a sprinkling of CEOs and a surfeit of more mundane, middle-ranking executives munching on expense accounts.

However, at the next table, I spotted a grey-haired, glum-looking gentleman. "It’s odd," I mused to Mole. "That chap looks a bit like a much older version of Mike Sherwood (co-head of Goldman Sachs International). Mole laughed. "Abigail," he said. "Welcome to 2011. That is Woody."

Sherwood, who has spent most of his career at Goldman Sachs – rising through the ranks of the fixed income, currency and commodities’ division – owns a lot of Goldman stock. One source estimates the share stack at close to $40 million. Perhaps that’s why Sherwood looked so gloomy. After all, Goldman’s share price has declined by more than 40% from its $175 peak in January. By the way, it’s worth pointing out that most bank employees now receive stock as a large part of their compensation. All plans awarded in early 2011 must now be severely under water.

If Teflon Lloyd were to be run over by a bus tomorrow, who would ascend the Goldman throne?

Woody’s glum demeanour might also have been a result of succession planning, or the lack of it, at the firm. For more than a year, commentators have been insisting that Goldman’s chief executive Lloyd Blankfein would have to step down. There have, indeed, been hiccups: the Abacus CDO case with the Fabulous Fab in the driving seat; the obvious hostility of regulators towards the firm; the "we do God’s work" interview. But Teflon Lloyd prances on. And I’m not convinced he’s going anywhere in a hurry. But if he were to be run over by a bus tomorrow, who would ascend the Goldman throne? Sherwood has been mentioned as a contender but my sources say this is unlikely. Potential candidates Gary Cohn, president, and Mike Evans, head of growth markets, are not popular internally. I wouldn’t discount David Viniar, the firm’s respected chief financial officer. But might the baton fall to Johnny Weinberg, co-head of the investment banking division?

Weinberg keeps a low profile but has form. He is part of a dynasty that has been at Goldman since the early 1900s. Johnny’s father John L Weinberg ran the firm from 1976 to 1990 and his grandfather, the sainted Sidney, was in charge from 1930 to 1969. Sidney, who started as the janitor’s assistant aged 16, came to epitomize the art of relationship banking. In his heyday, he sat on more than 30 corporate boards and is said to have attended an average of 250 board or committee meetings a year.

Blankfein might turn out to be one of the great survivors. Nevertheless, I am becoming increasingly convinced that the investment banking industry can be compared to the good ship Titanic, silently advancing through the dark night towards the immutable iceberg. Bank CEOs and bank boards have done their shareholders a terrible disservice: they refused to contemplate a plan B. What would happen if there was no sustainable economic growth after the rebound in 2009? And, of course, regulators have twisted the knife by insisting on higher capital requirements and lower leverage ratios.

One mole moans: "This is an industry in meltdown." As we wait to see if European politicians will proffer anything more substantive than woolly words, the European banking industry stands on the edge of a recapitalization precipice, and the results from US financial institutions will be poor. For how much longer can the industry justify an egregious compensation structure that elevates the pocket-books of employees and mocks the interests of shareholders?

Markets melted in September and the febrile rumour mill churned incessantly. Numerous contacts called to hiss down the line that the French banks were in big trouble and then tossed into the peppery pot: "Oh and I’m also hearing very bad things about Morgan Stanley and Bank of America."

It was hard not to be buffeted by such malicious tides, especially as the debt and equity of these banks plummeted. In late September, two-year Bank of America Australian dollar senior bonds were trading with a yield to maturity of over 9%. We are living in a tumultuous world where nothing is quite as it seems and there is limited visibility about the future. Super-low interest rates aren’t able to revive the economy, no one, except for central bankers, understands the efficacy of quantitative easing and in an Europe, which desperately needs growth, politicians have plunged us on a path to austerity. Ten years ago – in fact make that five years ago – if someone had told you that the rigid euro currency regime would flirt with self-destruction and that France and Germany would have to beg China for money, you would have characterized the visionary as insane and suggested that he check in to a sanatorium.

So it is easy to understand why rumours circulated about the robustness of some of the world’s leading banks. Although I never subscribed to this pessimism, I realize that the deep distrust surrounding financial institutions, exacerbated by Lehman’s demise, has not dissipated. Bank balance sheets are opaque. Think: level 3 assets, which are essentially assets whose fair value is unquantifiable, or the weird concept of debt valuation adjustment (DVA) whereby a bank makes a profit when the value of its debt, and therefore its credit, falls. In 2008, banks were saved by taxpayer money – in the form of direct injections or government guarantees for wholesale borrowing – and yet bankers’ lives continue to be gilded and garnished by million-dollar bonuses. Public antipathy has recently led to the amorphous anti-capitalist Occupy Wall Street protest has inspired copy-cat demonstrations in London and many other cities worldwide.

So how did leading investment banks Goldman Sachs and Morgan Stanley fare in the third quarter? The answer is not badly and certainly not badly enough to justify a 45% drop in their share prices for the first nine months of 2011. Goldman reported a third-quarter net loss of $393 million, only its second quarterly loss since going public in 1999. Much of this red ink was a result of brutal markdowns in assets held in the principal investment area such as its stake in Industrial and Commercial Bank of China. In the investment banking division, net revenues dropped by 33% from the third quarter of 2010 to $781 million, while revenues from investment management were roughly unchanged. As regards the trading side of the institutional securities business, revenues in fixed income, currency and commodities were down by a third year on year but equity trading revenues were 18% higher.

Commenting on these results, Lloyd Blankfein said: "CEO and investor confidence as well as asset prices across markets were lower in the third quarter... Our results were significantly impacted by the environment." It is interesting that Goldman’s shares rose 5% on the day of the announcement – my mole murmurs that there was a large short-seller who had to cover quickly – and have been tap-dancing higher since then.

Morgan Stanley’s results were also not disastrous. Although revenues were flattered by a large DVA uplift of some $3.4 billion, the firm beat analyst estimates and certain areas such as equities trading and advisory increased revenues year on year. Fixed-income and commodities revenues were down (excluding the beneficial DVA) on the comparable quarter in 2010 and lower than the previous quarter. Despite dark mutterings in the market concerning client outflows, the global wealth management division attracted $15.5 billion in net new assets and increased pre-tax income from the second quarter. My friends at Morgan Stanley are perplexed as to why the firm’s shares were hammered during the summer. I can only conclude that we are all a bit jumpy. The 2008 crisis is a mere three years ago and we worry that history might repeat itself.

Michael Tory is someone who saw September 2008 as a line in the sand. Tory, who once worked at Morgan Stanley, was head of Lehman’s UK investment banking business when the firm failed. Tory spurned the plump package proffered by Japanese firm Nomura, which had bought Lehman’s European operations. Instead Tory, together with partners Benoit d’Angelin and Michael Baldock, founded an advisory firm, Ondra Partners. Ondra turned three this October and I joined employees (and a few outsiders) to celebrate the anniversary at a wine bar near the Bank of England. I was impressed by the camaraderie and optimism of the group. The firm continues to do well and of course benefits from its client-focused, balance-sheet-light model. The positive morale at Ondra contrasts with the gloom expressed by most investment bankers whom I speak to at the big firms. I’m not sure whether there is a lesson for the rest of us in this tale of two models. Perhaps it’s simply that happiness lies in controlling your own destiny and that is very difficult to do in the big firms nowadays.

“The fundamental problems remain in that the weaker European sovereigns are not generating sufficient revenues to service their debt. There has been no real resolution except for an extension of the debt”

Some readers will recall that in my August column, I commended the views of Sean Egan, president and co-founder of Egan-Jones Ratings, published in an article in the financial magazine Barron’s. In the piece, Egan was very negative about the financial health of the periphery European sovereigns, European banks and even the European Central Bank. Following the plan announced by European leaders in late October to implement a 50% voluntary write-down on Greek debt, recapitalize some of the banks and bolster the European Financial Stability Facility, I called Egan to see whether his views had changed. Despite the euphoric reaction of the stock market, Egan was more cautious: "It is a plan to make a plan to make a plan," he mused. "The fundamental problems remain in that the weaker European sovereigns are not generating sufficient revenues to service their debt. There has been no real resolution except for an extension of the debt. "Our view is that the appropriate haircut on Greek debt should be closer to 90%, as opposed to 50%. We believe that Greece and the EU would be better served by handling the restructuring in a more traditional fashion. One of our biggest concerns remains what the balance sheet of the ECB looks like. As at December 31, 2010, it had only €5 billion of shareholders’ equity and since that date the ECB has made significant purchases of bonds issued by the weaker European governments.

"We’re looking forward to seeing more concrete details for the recent proposals but we worry that the markets may be disappointed once again. We feel that Germany and France may be reluctant to pledge resources in an effective manner as this could affect their own credit ratings. There’s been a lot of talk about kicking the can down the road but the end of the road may be rapidly approaching."

For all our sakes, I hope Egan is wrong. But I wouldn’t bet against someone with his strong track record.

How was your month? Please send news and views to abigail@euromoney.com

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