It is nearly six years since Lehman Brothers collapsed and financial markets teetered on the edge of calamity. As stability returned, all my sources in the banking world said that increasing regulation would be the new rule of the game. And this has proved to be the case.
Very few predicted however that fortunes would be made as central banks flooded economies with absurd amounts of cheap money for far too long. It does seem to me that we must be nearer the beginning of the end than the end of the beginning for this particular cycle.
But is it the end of the road for two bank chief executives who emerged from the crisis relatively unscathed? For a while now, wise sources have been questioning how much longer Brady Dougan and Anshu Jain can continue to pilot their respective European institutions. In mid-May, Credit Suisse pleaded guilty to an “extensive and wide-ranging conspiracy” to help US clients evade taxes. The bank agreed to pay about $2.6 billion in fines and became the first large global bank in decades to admit to criminal charges.
These fines dwarf the amount that UBS paid ($780 million) in 2009 for helping US citizens evade taxes. Credit Suisse, however, will not lose its licence to operate in the US. I read with concern US attorney general Eric Holder’s criticism of the Swiss bank, as quoted in the Financial Times: “Credit Suisse failed to retain key documents, allowed evidence to be lost or destroyed and conducted a shamefully inadequate internal inquiry.”
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Dougan has been with Credit Suisse for 25 years and has been chief executive for seven. He joined the bank’s executive committee in 2003. Surely, he has to take responsibility for the culture that prevailed at the bank and that led to these issues? Dougan is a highly intelligent and charming man, but it will be difficult for him to turn the page on recent events and lead the firm to greener pastures. Shareholders would welcome new leadership.
Moreover, it is simply not acceptable that the bank writes a huge cheque and everything stays the same, with cosy lunches in oak-panelled conference rooms and chauffeur-driven limousines. Shareholders suffer, employees coast along. We might as well be in a hippy commune rather than the conservative world of Swiss finance. Something went very wrong indeed at Credit Suisse. And either the chairman or chief executive has to do the right thing, be accountable and step down.
Indeed, perhaps Credit Suisse shareholders should have read a little more closely the Abigail with Attitude column. As long ago as May 2010 I was musing: “Is it bonfire night or bonfire of the vanities at Credit Suisse”.
I criticized a performance incentive plan that paid out in April 2010 and under which Dougan received SFr70 million ($78 million). I also commented in November 2010, after meeting a Credit Suisse board member, that I thought Credit Suisse would underperform UBS over the next year. My instincts were impeccable. Since November 2010, the Credit Suisse share price is down by some 35% and the UBS share price is up by about 5%.
Lack of judgement
Investors might also be wondering if Jain, co-chief executive of Deutsche Bank, should remain at his post. Jain has failed to get ahead of the need to recapitalize the bank properly. One capital raising might be a tiresome necessity foisted on shareholders by a cautious chief executive. Two capital raisings, within one year, hint at a lack of judgement and a failure to grasp the challenges facing the industry.
This May, Deutsche Bank launched a €8 billion rights issue, finally conceding that its capital ratios could not be organically strengthened quickly enough. Of course, Jain is only co-CEO alongside Jürgen Fitschen. However, many of the issues with which Deutsche is now grappling (Libor and FX probes, excess leverage) originate in the investment bank that Jain previously ran.
Deutsche is trying to position itself as the last European universal bank standing as other European banks wither on the vine and shrink back into the role of domestic players. This might be a reasonable aspiration, but it is the tougher choice. And Deutsche still has to contend with pending litigation related to Libor-fixing and FX trading as well as rigorous capital requirements for foreign banks in the US.
Unfortunately for Deutsche Bank’s senior management, the firm does not have a second string to its bow. It is not particularly strong in its domestic retail market, nor does it have a powerful wealth management franchise. However, after Credit Suisse’s recent experience, this deficit might be considered an advantage. I continue to worry that the Deutsche saga will not have a happy ending.
Nevertheless, I was amused to read about the slightly anarchic turn of events at the company’s recent annual general meeting. Some investors queried whether this latest capital raising represented a strategic U-turn and moaned about the wilting share price. “The share price performance is a tragedy,” Mr Speich, a fund manager at Union Investment, wailed. “When will this nightmare finally be over?”
As if this was not bad enough, Jain himself was heckled as he began to give a speech. A group of unruly protesters leapt to their feet and had to be escorted outside by burly bodyguards. Honestly, who would be a bank chief executive these days? The job seems to come with dwindling pay, limited perks and an extraordinary amount of stress.
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