Abigail Hofman, 23 March 2006:
Introducing a light-hearted look at the financial markets players as well as the issues that keep bankers up at night. In this piece Abigail brings us commentary on Deutsche Bank, HSBC, M&S tomatoes, and Sandy Weill's sweater.<br><br>---------------------------------------------------------------------
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In February, Deutsche Bank chief executive Josef Ackermann announced excellent 2005 results: pre-tax profits of €6.4 billion, up more than 50%. Deutsche also achieved a 25% pre-tax return on equity. That’s good news for shareholders, especially as the shares creep towards the €100 mark.
But behind the headlines, is all hunky-dory? The main problem for Deutsche is that it has lost its identity. A decade ago “the Deutsche Bank”, as it was known, was Germany incarnate and we all knew what it stood for. Most of the revenues were made in Germany, the links with Germany’s leading industrial companies were incontrovertible and Germans ran the show.
Today it’s a different story – London is the centre of the firm’s investment banking operations and most of the money is made outside Germany. Revenues from the “homeland”, in relative terms, shrivelled to a mere 30% last year, with a concomitant decline in the influence of the good German burghers (although they’re trying to turn it round at home – see our interview with Jürgen Fitschen, published in our April issue). Thousands of domestic jobs have been slashed and, let’s face it, the bank isn’t even run by a German any more – the urbane Ackermann is Swiss. In a way, we are talking “a tale of two cities”. Is this sustainable in the long term? It certainly has implications for the culture of the firm and once the culture of a firm becomes blurred, the rot tends to set in pretty quickly (remember Bankers Trust?).
“Deutsche has made it to the top in investment banking and is no longer tainted by its commercial banking origins,” a competitor notes. And according to the league tables, that’s more or less correct – even though the debt rankings still look best.
This brings us of course to Anshu Jain, the 43-year-old co-head of Deutsche’s corporate and investment bank. Opinion is divided as to whether the Indian-born Mr Jain is overweeningly arrogant or intrinsically admirable. There is no doubt that he is extremely ambitious and, my sources say, not the easiest person to work for. But perhaps that’s just because he’s so much brighter than the rest of us. One insider even describes Jain’s style of command as “management by terror”. Nevertheless, Jain’s operations (which basically boil down to fixed income and equities) are rumoured to contribute virtually half of Deutsche Bank’s profits. That makes him a very Grand High Pooh-Bah in the bank’s hierarchy.
Lately, however, there have been a few investment banking banana skins that augur ill. In Italy, Deutsche seems to have been dealing with all the wrong people, including the disgraced Gianpiero Fiorani of Banca Popolare Italiana. Indeed Michele Faissola, Deutsche’s global head of rates, purportedly features in Italian police transcripts (decidedly inappropriate if you ask me – although Faissola seems to dabble in a lot of different things. I am reliably informed that he also co-owns a swanky restaurant in Mayfair, Giardinetto). And then there’s the grubby saga (which broke this January) of Anshul Rustagi, the synthetic CDO trader who allegedly overstated his trading position by £30 million. Is the all-conquering Jain suddenly running a leaky ship?
It was therefore with some interest that I read the recent ingratiating Financial Times profile of Jain. Jain claims that Deutsche makes 60% of its profits from “clever stuff” (whatever that means) as compared with 25% to 40% at most other investment banks. What will Deutsche’s more conservative shareholders make of that? Does it mean that Jain is too clever by half?
The article mentioned that, in the second half of 2005, Jain “ran through detailed unpublished data” with top analysts to prove that “he was less exposed to downside risk than peers”. Can this really be the case? Isn’t there something awry here? I thought that in this politically correct post-Spitzer era, banks are meant to bend over backwards to treat little retail investors (like moi) with the same love and attention as muscular institutional beasts. So next time Jain decides to be generous with unpublished data, could he please call me first?
But what intrigued me most about the FT piece was the unspoken questions: where and why? Where was Jain’s co-head of investment banking, Michael Cohrs, who merited only one slightly dismissive sentence? And what did Jain and his PR advisers expect to gain from the piece? Could it be that the audacious Jain is keen to raise his profile and be seen as a potential successor to Ackermann, who is due to retire in 2010?
A lot of people seem all too ready to forget that Ackermann has done a pretty good job at the helm of Deutsche. The fact that he could still face a gruelling retrial over the Mannesmann bonus case should have shareholders weeping at the prospect, rather than salivating at the potential for his early retirement, which might come as early as this autumn (indeed this possibility is whispered about in the bank).
Jain would surely be a strong contender for the top job. But how will his aspirations be viewed in the German heartland? My hunch is he’s not the most popular bunny back home in Frankfurt’s Finanzplatz.
So there we have it: a somewhat preoccupied Swiss chief executive ruling the largest German commercial bank (which Germans no longer feel is very German) with a non-German speaking, clever-clogs Indian investment banker (who has become too powerful to lose) hovering in the wings. For some reason, I am reminded of the ancient Chinese proverb (often attributed to Warren Buffett): "It’s only when the tide goes out that you learn who’s been swimming naked." On the other hand, maybe thoughts of a naked Anshu Jain or, come to that, a naked Warren Buffett are just the wrong side of naughty. And what do you think?
HSBC is a fabulous institution that hardly ever seems to put a foot wrong – it has just reported record 2005 pre-tax profits of $21 billion. Except, that is, when it comes to investment banking.
I raised one perfectly shaped eyebrow when I read that the co-head of HSBC’s corporate, investment banking and markets (CIB) division, John Studzinski, (recruited from Morgan Stanley nearly three years ago, no doubt on a king’s ransom) was to become a “special adviser” to chairman elect Stephen Green. In other words Studs was “toast”.
But my rather flabby jaw dropped precipitously when, several weeks later, a “reorganization of investment banking” was announced. Lo and behold, Studzinski was to remain as co-head of the global investment bank alongside Stuart Gulliver (who is incisively described by one wag as “the brighter side of solid”).
What an embarrassing volte-face. Do I perhaps detect the stamping of bespoke Lobb loafers by an elegant American? For it would appear Studzinski is a controversial figure.
Ask around about Studs and some unfair and uncharitable comments rain down: “grossly over-promoted... career fatigued... only now really interested in charity work and a knighthood.” Now this seems harsh on Studs. He built a great reputation in his time at Morgan Stanley, and you don’t lose your touch overnight. And he’s hardly the first person to find out that the job of transforming a commercial bank’s investment banking ambitions into reality is one of the toughest assignments of all.
But even the digs from patently jealous competitors seem quite bland when compared with the words of a female colleague. She spat in to the phone: “Studzinski has an insatiable appetite for personal publicity. He has to be the bride at every wedding and the corpse at every funeral.” Now this applies to a few other bankers I know, but I wouldn’t want it as my own epitaph.
But when it comes to the “world’s local bank”, Studs isn’t the only one who gets it in the neck. “HSBC treats its investment bank like a bastard child,” another source harrumphed. “They indulge it periodically and then hand it back to the nanny.” One major client goes further: “Investment banking is just not in the HSBC DNA,” he insists. “Its profit contribution will always be relatively meagre in the larger scheme of things.”
I disagree. HSBC cannot afford to ignore this revenue stream. In the past, lumbering commercial banks such as Barclays and Deutsche have had the vision and patience to build successful investment banking operations. So why can’t HSBC? The bank is actually halfway through a five-year plan to build up this business. But the results, it has to be said, are not stunning: despite spending millions in the past few years to hire investment bankers, 2005’s M&A league table performance was limp. Recently announced roles for Generali, E.ON and Mittal Steel are good news, although detractors mutter about conflicts and “mandates by default”. Indeed profits from the whole CIB division fell last year against a backdrop of excellent market conditions.
I hate to be mean-spirited but the recent reorganization of HSBC’s investment bank hints at rearranging the deckchairs on the Titanic. Ultimately, investment banking nirvana comes down to effective leadership, and that’s the missing piece of this jigsaw. As far as I’m concerned, the appointment of “co-heads” is normally a gigantic fudge that merely sets the stage for political infighting. And I will take a lot of convincing that the relationship between “Studs” and “Stu” is anywhere near harmonious. This one will run and run, methinks...
Just an afterthought from a humble scribe, but hasn’t the cerebral and charming 40-something Clive Bannister (yes he is the son of the fleet-of-foot Roger) performed superbly by turning round HSBC’s private bank? Together with an able team, he has virtually quintupled profits in seven years and HSBC was ranked an impressive third in Euromoney’s 2006 ‘best private bank’ poll. Not bad when you think that heavyweights like Goldman Sachs and Deutsche were relegated to ninth and 12th place respectively.
Why not give Bannister Junior the challenge of sorting out HSBC’s investment bank once and for all? With his management consulting background (he was one of the youngest ever partners at Booz Allen), he might just fix the problem.
Despite competition from numerous thrusting newcomers, Le Caprice remains one of my favourite Mayfair eateries. I like the food, the piano player and most of all the warm welcome from dishy maitre d’ Jesus Adorno. One evening, my beady eye alighted on Stuart Rose, the chief executive of Marks & Spencer, at the next table.
Bashfulness not being something I suffer from, I sallied forth, proffered a paw by way of introduction and launched into a tale of woe about how tasteless the tomatoes were at my local M&S store.
Mr Rose couldn’t have been more charming, took my card and promised to undertake a tasting himself. Next day, I received a follow-up email from his executive assistant. Impressive, n’est–ce pas? I wonder how many top bankers would be so customer focused when accosted while “off duty”.
Talking of which, it was a snowy Saturday morning when I nearly elbowed a grey-haired avuncular American in the ribs – such was the melee around the concierge desk at the luxurious Hotel George V in Paris. I could tell he was American because he was wearing one of those jumpers Americans always sport (you know, baby pink lambswool or, in this case, multi-coloured stripes going the wrong way because the gentleman in question was slightly tubby: think “skittle shaped”). “Be careful with your elbows,” hissed my best girlfriend – also an ex-investment banker. “That’s Sandy Weill next to you.”
And so it was. Suddenly, the avuncular one appeared less avuncular when I realized he was the legendary and supposedly über-ruthless Citigroup chairman, who will finally relinquish the reins of power next month aged 73. But do giants like Weill ever really retire, or do they just mature like good wine?
Later that evening, as I crossed the hotel lobby lounge, I glimpsed the fluorescent striped jumper again. This time Weill was seated with the owner of the George V, Prince Alwaleed of Saudi Arabia (who is one of Citigroup’s largest shareholders).
The prince was doing a lot of hand-waving... I wonder what that was all about? Perhaps his royal highness could not contain himself while thanking Weill for all his endeavours at Citi’s helm. Maybe he was just admiring Sandy’s jumper. But then the performance of Citi’s share price can’t exactly be described as stellar in the past few years, can it? I suppose if I had billions of dollars invested in a lacklustre stock, I might do a bit of hand-waving myself!
Next month, a US bank that has lost its way and what senior management should do to prevent Armageddon...
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