Macaskill on markets: Sideways – Penalty augury
Banking industry analysts are not to be deterred in their quest to quantify the unquantifiable. The new philosopher’s stone for the modern day alchemists of analysis is finding a way to estimate the size and impact of future fines for misconduct by banks. This may not be quite as challenging as transmuting base metal into gold, but it presents difficulties nonetheless.
Regulators increasingly provide some post-fact guidance on how they reached the size of a fine for a particular bank, and there is methodology emerging in areas where many banks are punished for similar transgressions, such as mortgage abuses in the US.
But banks are limited in the disclosure that they can offer to investors on how their bilateral discussions (or pleas for mercy) with regulators are progressing.
Bank analysts at Barclays seem to think that some firms are attempting to send coded signals to shareholders in their quarterly results announcements, in much the same way as recently deceased US admiral Jeremiah Denton blinked the Morse code for ‘torture’ in a filmed message when he was a captive during the Vietnam War.
The Barclays analysts recently released a note updating their estimates of likely litigation costs for UBS, Credit Suisse and Deutsche Bank, and downgrading UBS as a result – though only to the politely underwhelmed ranking of ‘equal weight’.
Barclays noted that the three firms have recently taken litigation charges of SFr8.8 billion, SFr5.1 billion and €7.3 billion respectively, and that these amount to 14%, 13% and 21% of current market capitalisations, or around a year’s normalized earnings.
“The bad news is that these charges have been continuing steadily and heavily through each of the past few quarters, with no sign of abating, and we are now heading into the back end of the year, which is likely to involve further settlements and provisioning top-ups,” the analysts said.
But they also found a reason to be cheerful: “A more positive indicator is that the page-count of litigation footnotes in quarterly reports has reduced somewhat from the 3Q/4Q13 peak, which could be taken as a positive forward indicator for shareholders that we’re past the worst on the case list and the financial hits.”
This page-count metric may well be a positive indicator, of course. But it may also reflect a degree of wishful thinking on the part of the bankers and investor relations staff who agree the language of quarterly reports. And another possibility is that the legal officials responsible for litigation footnotes are simply providing more concise input.
The prevailing metric in the legal profession overall remains the billable hour, with the underlying goal its extension at the highest possible rate. In-house legal employees at banks are not paid by the hour, but they share their work with external counsel and the impulse to extend a task for as long as possible is at the very core of the lawyerly soul.
There is such an abundance of legal work related to regulatory infringements in finance and adaptation to incoming rules that even the impulse to extend all jobs as long as is feasible might be overwhelmed by an urge to be concise, however.
And senior bankers hoping to downplay the significance of future fines may encourage this urge. Of the three banks covered in the Barclays analysis of litigation costs, only the senior managers of UBS are likely to feel relatively confident that their own positions will remain unaffected by big future pay-outs.
UBS chairman Axel Weber and CEO Sergio Ermotti were appointed to clean up the mess left by their predecessors, and investment bank head Andrea Orcel did not work in the areas that will be subject to fines.
Credit Suisse CEO Brady Dougan was at the helm during the period when the abuses took place, however. And Deutsche Bank co-CEO Anshu Jain was in charge of markets when the misconduct in the FX and rates businesses, which is expected to generate further substantial fines, took place. There are also divisional heads of the areas under investigation still in senior jobs at these banks, even if some of them have changed their areas of responsibility.
Abbreviated legal footnotes may not save some of these senior bankers if shareholders finally decide that the weight of fines has become so great that management changes have to follow.