Abigail with attitude
I must admit that the cacophony surrounding Stephen Hester’s bonus has taken me aback. In late January, Royal Bank of Scotland decided to award its chief executive a near-£1 million bonus for 2011 in addition to his £1.2 million salary which, under enormous media and political pressure, Hester was forced to decline.
Should he have done so? And should he have been awarded the bonus in the first place?
Hester’s scorecard for his tenure at RBS is frankly not bad. In many ways, it is pretty good. I would give him a B-plus.
In 2011, the RBS share price sank by approximately 48%. This decline was in line with other big European and US banks. The bank’s profitability, however, increased in the first nine months of 2011 (pre-tax profits were £1.2 billion) compared with the same period in 2010 when the firm made a pre-tax loss. RBS narrowly failed to meet its lending targets for small businesses.
But the balance sheet has been reduced substantially: some £600 billion of assets have gone since the fourth quarter of 2008. The investment bank is now being savagely shrunk, with some 4,000 job losses expected as it focuses only on the businesses it is good at. Hester should get brownie points for making these tough decisions; but he should lose them for not taking them sooner. The bank did not have the balance sheet or brand to be an important competitor in investment banking any more.
The hysteria in the UK about Hester’s harvest (or should that be hemlock?) is disturbing. Although I had long expected this year’s bonus round for bank chiefs to be controversial, I find it disturbing that for the last few mornings when I have listened to the Today programme on the BBC, there has always been a politician, a trade unionist or a corporate governance specialist pontificating about the Hester bonus. "I bet Hester wishes he had never taken the job," a source said, waving a copy of the Daily Mail newspaper at me. There was a double-page article on Hester, his wealth, his homes and his recent divorce. It is unfortunate that Hester’s corpulence brings to mind the two words in the dictionary most dreaded by senior bankers: "fat cat".
The debate has gone viral and most people are desperate to give you their view on the subject.
Here’s mine: I think the bonus was fair. It’s certainly below the going rate for the CEO of a big bank. And if Hester walked out, it would probably cost more to replace him with someone of similar calibre. Whisper it, if you dare, but who in their right mind would want that job?
Nevertheless, Hester has shown limited emotional intelligence in initially accepting the bonus. The post-tax sum would not have changed his life or materially increased his wealth. He was, after all, a senior banker at Credit Suisse in the good years and a well-remunerated chief executive of British Land and senior executive at Abbey National before his RBS tenure. He therefore comes across as petty and greedy and that is certainly the way he will be portrayed in the popular press. Indeed the uproar might make him a less-appealing candidate for his next big job, whatever and wherever that might be.
But there is a winner in all this. Lloyds’ chief executive, António Horta-Osório, declined his 2011 bonus. He took medical leave for the latter part of 2011 so this decision is easy to understand. But nevertheless he must be glad that his bout of insomnia is no longer front-page news. The furore about bank chief executives’ compensation will not end with Hester.
This might be only the warm-up match for a veritable gladiatorial contest over the Barclays bosses’ bonuses. And it has not yet been announced whether RBS’s investment banking chief, John Hourican, will receive the 20 million-odd shares (worth some £4 million) which he was awarded in 2009. Watch this space.
In late January, I had lunch with three former colleagues. We used to work together at a large investment bank 20 years ago. Our clients were the main European sovereign treasuries and we had numerous discussions with them about preparing for the euro and what the brave new world would look like when it dawned in 2002.
During those discussions, there were very few doubters. It was as if one were dealing with a group of religious fanatics. Questions marked one out as an intellectually challenged quibbler who lacked the "V" word where "V" stood not for victory but for vision.
There were certain things that didn’t make sense to me. I didn’t understand why all these different European countries would continue to auction their own debt – effectively in competition with each other. I didn’t understand how the euro could be created without a provision for a country to withdraw. And I didn’t understand how one economic policy would fit all. There’s a large divergence between economic conditions in northern and southern Italy, so how can one interest rate work for both Germany and Greece?
My lunch companions are some of the brightest individuals I know and are still involved in the financial world. Nevertheless, we spent half an hour trying to work out what a Greek default and departure from the euro would look like. And we still couldn’t figure it out. It is fair, though, to say that we agreed with the European bank chief executive who told me: "If Greece leaves the euro, Greece will become Somalia."
If you think about it, most Greeks have mortgages denominated in euros and they will be trying to pay their mortgages off in devalued Greek drachma. Moreover, if Greece leaves the euro, the euro is no longer the euro because part of its value is the Greek component. Pretty quickly your head starts spinning. Regular readers will know that I am a Cassandra in the making – always seeing shadows where others perceive light. I’m not convinced the euro is sustainable and I don’t subscribe to the "We’ll all muddle through" scenario favoured by many commentators and investors.
A delicious nugget reached me that shows how Kafkaesque the whole European drama has become. A British civil servant recently attended a summit of European finance officials. Mr UK was amused when Mr Spain launched into a tirade against the rating agencies. "They have ruined my risk-free rating," moaned the Hispanic one. Mr UK refrained from commenting that for most people the Spanish credit had never been viewed as risk-free even in the days when Philip II of Spain was menacing the shores of Britain with an armada.
And talking about menacing, I have learnt that the chief executive of a big UK bank is employing security guards and has reinforced the windows of his London mansion to make them shatter-proof should a brick be hurled at them. Chief shares my sentiment that highly paid, high-profile bankers are reviled by the public, who view large annual bonuses as "blood money" for shafting the little people rather than as justified rewards for worthy endeavour. I wrote about this in my December 2011 column: "I do not rule out that things could get nasty. A mole murmurs: ‘I have told senior management that 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.’"
So I am not surprised that senior bankers are rushing for the exit. Financiers in the west are now "Public Enemy Number One". Do you really want to creep around with a blanket over your head in case someone recognizes that you are a senior banker and throws an egg at you? Your children are jeered at school because their father is an evil money-maker and your X-ray wife is no longer a shoo-in for chairperson of the prestigious charity committee because the board believes it should have "someone whose husband makes a proper contribution to society".
In January, it was announced that Edward Eisler and David Heller, two of Goldman Sachs’s trading co-heads, were leaving. Both men are in their early 40s and have been with the firm for over 15 years. This comes on top of news that some 50 partners left Goldman in 2011 and that Walid Chammah, chairman of Morgan Stanley International, will retire from the firm this spring.
Might it be that if you are senior and have made oodles of money, investment banking is no longer an attractive career? A hedge fund source hurrumphed: "These investment banks are going to be beaten down until they resemble utilities. If you’re smart, rich and young enough to do something else, do you want to hang around merely to earn $4 million a year?"
Such sums seem munificent to normal people but for former masters of the universe, $4 million is insufficient compensation for the hassle of dealing with demanding regulators and the derision that comes with the job. Eisler and Heller will not be the last to leave.
In investment banking, senior executives are rarely fired. Just as politicians leave to "spend more time with their families", top bankers leave "to pursue opportunities outside the firm". Or they "retire", often only to reappear in a new role at a different firm after a period of reflection.
In Bhattal’s case, the official announcement settled on the retirement option. But in this case, there could be more to meet the eye than is normally the case.
What’s clear is that Nomura’s poor performance meant there were some very tough decisions to be made at the firm. As I wrote in my October 2011 column: "An impeccable source told me: ‘Nomura has to fire Jesse Bhattal (the current head of wholesale and deputy president of the firm who used to be Lehman’s chief executive in Asia) and bring in someone who is unemotional about the past and prepared to make drastic cuts. They need to get out of all wholesale businesses that are not profitable and shrink back to areas that build on their core expertise as Japan’s leading brokerage firm. Source is correct and after wasting billions of dollars of shareholders’ money, Nomura should swallow hard and follow his suggestions."
Bhattal was an experienced operator, although one source who knows him well says: "Jesse is a fantastic salesman, but he was never so good at the strategy side."
Despite this, could it be true that he had been pressing Nomura’s senior management to make deep cuts to the business, which were more than the paymasters in Tokyo were prepared to stomach? Or did he, as another source suggests, want to pull back from Nomura’s misfiring equities division and reinvest in its fixed-income franchise?
Such discussions are never easy, and even harder to bring to a conclusion that suits both parties. It’s perhaps fair to say that there are often two sides to the story. Here, the reality would appear to be that Nomura and Bhattal were under severe pressure and on different paths, and that a parting of the ways became inevitable – whoever instigated it, and however it was concluded.
Nomura has reached an unpalatable crossroads: what to do with the wholesale division that it substantially expanded when it acquired the European and Asian operations of Lehman Brothers in October 2008?
The press release announcing Bhattal’s decision to retire from his position as president and chief executive of the wholesale division states: "Mr Bhattal’s responsibilities will be assumed on an interim basis by Nomura group COO and chairman for wholesale, Takumi Shibata, who will also determine the strategy to appoint his permanent successor." The press release also talks about Nomura being well positioned to establish itself as "Asia’s number one global investment bank". I would take that with a generous pinch of salt.
What should we make of all this? I was probably one of the last financial journalists to sit down with Bhattal. My October article did not go down well with the Japanese firm. Nevertheless, in early November (after Nomura had announced a poor set of second-quarter results: the wholesale division lost $1 billion), I was ushered down to Nomura’s gleaming new London headquarters to meet Bhattal.
We spent an hour together and got on well. In my January 2012 column, I wrote: "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 may be a killjoy but I remain cautious on the Nomura story." Perhaps I was too cautious about just how desperate the situation was.
Any chief executive who leaves a firm voluntarily before the annual bonus round is in danger of being accused of letting his colleagues down. However, Bhattal might have felt that he was losing traction with the Japanese paymasters and would not be able to deliver for his people. A source muses: "Jesse must have known things were going badly, and perhaps he wanted to get out while he had some dignity left."
And compensation goes to the heart of many of the problems at Nomura, according to a banker who used to be part of the business: "That’s one of the main things that’s wrong over there – everyone focused on personal gain rather than doing the right thing for the firm. If ever one wanted to make an example of the impact of the wrong compensation culture on a firm, this is it."
Tarun Jotwani, head of global markets, has also left Nomura, contributing to the impression that the firm is floundering. One banker close to the situation says Jotwani might have expected to take on Bhattal’s role as head of the wholesale business, although a Nomura source insists that Jotwani was let go as the firm sought to unwind the global markets division that he headed.
Jotwani was a FOB – "a friend of Bhattal". Last March, he was promoted from head of fixed income to head of global markets, which included both the equities and fixed-income divisions. Jotwani might have become a bit big for his boots. A mole murmurs conspiratorially about "Jotwani alienating some colleagues and developing a rock-star mentality: metaphorically demanding pink pillowcases and freshly squeezed guava juice like Beyoncé or Madonna". Another source is more positive: "He’s very capable and hard-working – a solid performer."
Shibata, a long-term and highly rated Nomura employee, is now running the wholesale division. The decisions that he makes will be of crucial importance – not least for the firm’s long-suffering shareholders. The world is a very different place to what it was in 2008 when Nomura embarked on its quest to be Asia’s global investment bank. Senior managers need to rethink the tired mantra about being a global anything.
Stuck in the middle – which is where Nomura is – is not a good place to be. I envisage that, in the future, there will be a few global investment banks but only a handful – JPMorgan, Goldman Sachs, and maybe Deutsche, Morgan Stanley and Barclays.
Nomura’s senior management and Shibata now have a chance to rethink their strategy and get ahead of the game rather than clinging stubbornly to a plan that has failed and that is probably unworkable if markets remain difficult.
Is an all-singing, all dancing global wholesale division in the best interests of Nomura’s shareholders? Remember Nomura has also been trying to build a US presence organically, which no foreign firm has ever succeeded in doing. Might Nomura finally see the light and scale the wholesale division back? A commentator muses: "What is so wrong in niche? Nomura could have a great business in Japan, do some stuff outside which has synergies with Japan (perhaps Asian M&A) and actually make a decent return for shareholders."
The other issue that seems to preoccupy commentators and employees is who will replace Bhattal? Will Nomura look outside for a new leader of the wholesale business? This story still has some way to run.