Abigail with attitude
In the run-up to Christmas, I met up with three bank chief executives. This opening sounds a bit like a line from the carol The 12 days of Christmas. In that case, it would be followed by a chorus of "and a partridge in a pear tree". I found the chiefs weary after an unexpectedly tough year. One was recovering from flu, another had suffered a nasty bout of pneumonia and the third looked shattered.
Moreover, their mood was even more downbeat than their physical health. They all expect 2012 to be difficult for the financial services industry. One fearless leader mused: "I can’t understand it, Abigail. I have people working for me earning $2 million a year and they still have debt. How are they going to manage next year if they lose their jobs?"
Job cuts were on all the chiefs’ minds. They virtually admitted to me that the cuts announced this year would be followed by much more savage culls if the good times failed to roll in the next few months.
They were all concerned about compensation, which confusingly was too much and too little at the same time. The chiefs acknowledged that industry pay must decline but insisted they needed to pay the top producers in case "they cross the street or go to a hedge fund".
I don’t share this anxiety. Things will be so bad in 2012 that good people will want to stick no matter what. Also, if equity markets are dire, I’m not sure many hedge funds will excel. Remember, the hedge fund industry sagged in 2008; investors suddenly had to learn new terms, such as gates and side-pockets.
If senior managers are sharing their pessimism with me, how cheery will they be with their underlings? I envisage a burgeoning spiral of moribund morale permeating the building.
The key issue is that few divisions are making money. One chief, who is in charge of a global investment bank with nearly 20,000 employees, said the only areas that were dependably in the black each month were European credit, foreign exchange and equity derivatives.
In addition, increased regulatory and compliance demands have added layers of non-revenue-producing box-tickers. So the industry’s dynamics are flawed at the moment.
And if you add to this more macroeconomic problems resulting in further write-downs on European government debt, we could well see big European banks nationalized. This might cause a nasty case of global contagion.
I empathize with these men at the top, but if things deteriorate this year, the crowds will bay for their blood.
Don’t let’s forget that last year most investment bank chief executives earned millions of dollars, albeit that some of this was in deferred stock. In western economies, most people away from planet banker have seen their living standards eroded by insidious inflation and limited wage increases.
No wonder a well-connected source mused: "Bank bosses are in denial. They won’t accept that the model is broken and lots of parts of the business might not make any money for the next few years. In a way, they are as much in denial as the European politicians. The European politicians won’t face up to the fact that the euro model is broken."
Investment banking is a roller-coaster ride. We all know that. There are periods of frenzied activity when the cash registers ring overtime and pallid patches when everyone runs very hard to stand still.
I expect 2012 to be tough, but there have been other tough periods for the industry. We all remember that 2008 was no picnic and the boat seemed to be shipwrecked in 2002 as the TMT balloon deflated and accounting scandals engulfed US corporates. Somehow the top financial services firms always bounce back. Goldman was founded in 1869 and JPMorgan in 1871; they’re still with us.
Is anything different this time? Perhaps. In the west, a lot of our problems are assumed to be the fault of the banks, and bankers are hated by the general public. I have tried repeatedly to work out why this is. The public don’t universally hate footballers, and footballers also earn a lot of money. It is a combination of factors.
First, most senior bankers "don’t get it" – they insist that the current mess has nothing to do with them, that they deserve huge pay-outs and continue to lead the pampered lives they have always led.
Secondly, most normal people can’t understand why senior bankers deserve so much money for performing the mundane function of oiling the wheels of capitalism. Bankers think they are enormously clever and talented. Normal people think bankers are overpaid filing clerks.
Nevertheless, there is more than a whiff of scapegoat about this anti-banker hysteria. For example, in early January, Paul Ruddock, the founder of the London-based hedge fund Lansdowne Partners, was knighted.
The popular press snarled that this was the man who had shorted the British bank Northern Rock as it lurched towards bankruptcy. Thus Ruddock had made money out of other people’s misery and at the taxpayer expense when Northern Rock had to accept government money.
The articles missed the point that although Ruddock has been a donor to the Conservative Party, he is also a very generous patron of the arts. More importantly, they missed the point that it was Northern Rock’s management that cost the taxpayers billions, not Ruddock.
I am not optimistic that bankers will become more popular in 2012. The golden fountain has been poisoned and in the next decade our children will no more aspire to be financiers than we aspired to be civil servants.
If, as 2012 unfolds, you are a banker and if this year turns out to be as bad as some commentators are predicting, what should you do?
I cast my mind back to my own career in the City, during which there were a few fallow patches. In 1987, there was the famous equity market crash. In 1994, the Federal Reserve embarked on a policy of raising interest rates. I was in debt capital markets originating bond issues and no institutional investor wanted to purchase a fixed-rate obligation that would be under water in two months’ time. In 1998, my firm lost much more than it could afford to lose when Russia defaulted and the hedge fund LTCM spiralled out of control.
During periods of market dislocation, everything goes eerily quiet. You don’t want to be overheard chatting too loudly to your mother
What I remember from all those periods is the silence. Normally, trading rooms are noisy; it’s hard to concentrate. The room reverberates with energy; everyone is eager to do deals and make money. But during periods of market dislocation, everything goes eerily quiet. Quite simply, there’s nothing to do. And you don’t want to be overheard chatting too loudly to your mother, so you whisper into the phone.
The most important lesson I learnt during the bad times was to keep your head down and appear pliable. If you could ride it out, you could then ride the wave back up when the tide turned.
We were all paid much less in those days as salaries were low, so if management thought you had potential, they would carry you for a few months even if deal-flow was scarce. But it still felt scary to walk into the office knowing you had nothing to do but call clients and tell them markets were closed.
Today, I’m sure the atmosphere is worse. Compensation is so hefty that bosses might resort quickly to the nuclear option – sacking good people. If I were a mid-level banker, I would spend a lot of time contemplating a plan B.
If banks falter badly, will some bank chief executives face the guillotine, as happened in the 2007/08 meltdown?
To some extent, bank chiefs are grudgingly seen to be trying to sort out the mess their forebears inflicted. When Ossie Grübel resigned from UBS last autumn, after Kweku Adoboli’s alleged unauthorized trading loss, many investors and commentators were taken aback. Instead of rage against a senior banker, there were murmurings of sympathy for his dilemma and no certainty that any successor could do a better job.
Of course, Grübel had played his hand well: in 2010 he took no bonus, on the grounds that UBS’s share price had not increased. This bonus round will be key. If chiefs show restraint, their stakeholders will be more tolerant of any unexpected explosions in 2012.
However, I note that there are some talented 50-something senior bankers who have the ability to step up and run their own show: think Tom Montag at BAC-Merrill Lynch, John Havens at Citi, Fawzi Kyriakos-Saad at Credit Suisse, Greg Fleming and Colm Kelleher at Morgan Stanley, or Jean Pierre Mustier at UniCredit.
The last big casualty of 2011 came just as we were winding down for Christmas. The phones started ringing off the hook. Moles were calling to discuss the surprise departure of Michel Péretié, head of Société Générale’s corporate and investment bank.
Péretié, who joined the French bank in 2008 from Bear Stearns, is said to be leaving "to pursue other opportunities". He will be replaced by SocGen’s chief financial officer, Didier Valet, while Christophe Mianné becomes deputy chief executive of the division. Bertrand Badré, a former Crédit Agricole CFO, takes over Valet’s role.
My sources murmur about Péretié not engaging fully with the SG culture and being cold-shouldered by key, long-standing SG investment bankers. There was even a mention of an internal revolution, which sounds deliciously Gallic.
Just as we were winding down for Christmas, the phones started ringing off the hook. Michel Péretié, head of Société Générale’s corporate and investment bank is leaving ‘to pursue other opportunities’
I was never convinced that Péretié’s decision to build out the corporate finance platform and expand the US fixed-income business would work. Nevertheless, his departure smacks of infighting and intrigue, which SocGen can ill afford during this difficult period for European financial institutions.
I hear that Valet is very intelligent. However, his background is an equity research one. Writing about banks is very different from running them and given Valet’s recent role as CFO, one might expect some sort of restructuring at the investment bank. I look forward to meeting Valet as he gets to grips with his new responsibilities.
If you do take over a large financial institution in these difficult times, don’t expect it to be luminosity and largesse. In fact, I have two words for any new chief prancing into his spacious corner office: the first is hard; the second is slog.
This brings me back to a subject I wrote about in my December column – Lloyds Banking Group. It transpires that the chief executive, António Horta-Osório, was suffering from an intense interlude of insomnia that left him an apathetic husk rather than his normal ebullient and energetic self.
Horta-Osório has been widely criticized for not delegating sufficiently and thus assuming an overly burdensome workload himself.
Doesn’t this caviling miss the point? As a new chief, it is likely that you will want to hire an inner sanctum of your own people. Most successful chiefs do this when they land on new territory.
It was natural that Horta-Osório should seek to dismantle some of the empire built by his predecessor, Eric Daniels. However, most target hires were and are at other firms and will probably have a notice period of at least three or even six months. Meanwhile, the old guard realize their time is up and, even if they prostrate themselves oleaginously before the new overlord, they will forever be associated with the old regime. Such individuals start to think about moving to pastures new.
This was the case with Lloyds finance director (and acting chief executive until Horta-Osório returns in January) Tim Tookey. In September, Tookey resigned from Lloyds to go to an insurance company. Given the old guard were moving on and the new guard hadn’t quite moved in yet, it was inevitable that the person at the top had to run the shop and take the strain.
I am glad that Horta-Osório returns to work this month. But Lloyds will find 2012 as challenging as 2011: the UK will grow at a snail’s pace and might well slip into a double-dip. Also, chairman Sir Win Bischoff is no spring chicken at the tender age of 70; there might be more change at the top.
Even though bank chiefs are grappling with the same problems (declining revenues, inflexible bloated cost base, obdurate regulators), each institution faces its own set of problems.
For some reason, I am reminded of Tolstoy’s wonderful opening to the novel Anna Karenina: "Happy families are all alike; every unhappy family is unhappy in its own way."
As 2012 begins, I wonder how Nomura’s wholesale division will fare. In October, I criticized Nomura for expanding too aggressively and not cutting costs sufficiently. In short, its strategy since acquiring Lehman’s European and Asian operations in the autumn of 2008 had not been value accretive for shareholders. The Nomura PR machine took umbrage and I received several hectoring phone calls.
So it was interesting to see that in early November when Nomura reported its second-quarter results for the fiscal year ending March 31 2012, the firm announced: "Given that market conditions are expected to remain challenging over the short term, we plan to reduce costs by a combined $1.2 billion, which includes the $400 million in reductions announced last quarter."
The wholesale division reported a pre-tax loss of $1 billion and wholesale revenues dropped by 51% year on year; European wholesale revenues were down 79% for the same period.
What’s hurting most is that clients clearly aren’t buying into what Nomura claims to be offering: according to data from Thomson Reuters, the firm’s fee revenue from debt, equity, M&A and loan arranging fell by 35% in 2011 compared with 2010. And the past 12 months were supposed to be the time we saw Nomura’s investments really start to pay off.
After these disappointing results, Moody’s put Nomura Holdings on review for possible downgrade from its current Baa2 rating (two notches above junk). Moody’s review of Nomura will consider "the impact of ongoing losses from the firm’s international capital market activities and the likely effectiveness of the announced cost-cutting programme [as well as the] strategic options facing the firm due to the failure to generate synergies and returns from the Lehman acquisition".
I’m not sure that in this day and age it is a good thing to find oneself aligned with the ratings agencies on anything. Nevertheless, I will watch like a hawk to see if Moody’s does downgrade the Japanese firm.
In the middle of all this, I went down to the City to meet with Nomura’s chief executive of wholesale, Jesse Bhattal. Jesse was charming but adamant that Nomura was on the right track.
I asserted robustly that the $1.2 billion of announced cuts would prove insufficient and more drastic action was needed. This year will prove which of us had read the runes correctly. I might be a killjoy but I remain cautious on the Nomura story.
How was your month? Please send news and views to Abigail@euromoney.com