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Opinion

Abigail Hofman: A new breed is stalking the financial markets: it’s called an interim.

Despite all the jawboning over the past few years about succession planning, banks seem woefully unprepared if they are forced to jettison a flailing chief executive because of cauldron-like shareholder pressure.

Merrill Lynch had two co-presidents flanking Stan O’Neal but, as Stan started to topple, neither was considered quite right to succeed the big guy. How many people work at Citi? Perhaps 325,000, roughly the size of Pittsburgh. Surely one individual could have been found to replace pallid Prince permanently when he was chucked out? Instead, Sir Win Bischoff and Robert Rubin were wheeled out as an interim management solution. Is "dynamic duo" the right phrase to describe the odd couple of aristocratic Brit and American Jew? Or is it rather a cautious pairing of two respected elder statesmen?

“Investment banking is one of the most
highly paid global industries, and its
ranks are infused with the intelligent.
So how come when two of the top
institutions lose their leaders, there is
such a scarcity of potential successors?”

As a former investment banker, I was always amused (and sometimes bemused) by the pointless platitudes senior management utter. A phrase beloved of many banking bosses is "We have a deep bench of talent at XYZ Securities." If you prod that phrase with a stick, it is revealed as a pile of rubbish. Why talk about "deep bench?" What’s wrong with "sturdy table"? And "talent" is a word only the pretentious use. Talent for what? Tap-dancing around the bedroom, cleaning floors, writing poetry? Could the phrase be any more meaningless? Anyway, in these crisis months, the investment banking "deep bench of talent" has collapsed faster than the net asset value of a swooning SIV.

Investment banking is one of the most highly paid global industries, and its ranks are infused with the intelligent. So how come that when two top

“Sir Win Bischoff and Robert Rubin were wheeled out as an interim management solution. Is ‘dynamic duo’ the right phrase to describe the odd couple of aristocratic Brit and American Jew? Or is it rather a cautious pairing of two respected elder statesmen?”

"Sir Win Bischoff and Robert Rubin were wheeled out as an interim management solution. Is ‘dynamic duo’ the right phrase to describe the odd couple of aristocratic Brit and American Jew? Or is it rather a cautious pairing of two respected elder statesmen?"

financial institutions lose their leaders within a week of each other, there is a scarcity of potential successors? Only two individuals were tipped for the top vacancies: John Thain, former president of Goldman Sachs, and Larry Fink, chief executive of BlackRock. Where has the deep bench of talent for the investment banking industry gone? A mole commented: "The problem is that bankers become so specialized that very few have an overview and vision that would enable them to run a multi-faceted firm." And, of course, investment banking rarely breeds good managers. The emphasis and rewards all line up for producers. Those who enable the producers to produce risk being felled when fallow times fall and never engender much respect when the good times roll. The concept of an interim chief is fascinating because it is unclear whether it implies high status or has a whiff of yesterday’s man. I’m beginning to believe that being an interim is not as prestigious as it sounds. There might be an aura of "Won’t mess up before we get the right person in place" about it. Think: steady hand on the tiller rather than formula one superstar. For example, at Merrill Lynch, Alberto Cribiore, the interim non-executive chairman, lasted a mere two-and-a-half weeks before he was hustled off stage. Hardly enough time to move into the spacious corner office and commission a few pieces of tasteful sculpture to adorn it.

“Alberto Cribiore, the interim non-executive chairman at Merrill Lynch, lasted a mere two and a half weeks before he was hustled off stage. Hardly enough time to move into the spacious corner office and commission a few pieces of tasteful sculpture to adorn it”

"Alberto Cribiore, the interim non-executive chairman at Merrill Lynch, lasted a mere two and a half weeks before he was hustled off stage. Hardly enough time to move into the spacious corner office and commission a few pieces of tasteful sculpture to adorn it"

A source sniffed: "You need a chap who understands that this is a limited assignment. You don’t want someone who, having had a taste of power, will cling on in crazy stalker-like fashion. Avoid Isildurs is my advice." Isildur, a character in JRR Tolkein’s Lord of the Rings, refused to part with the ring once it came into his possession. In other words: overweening ambition is out, you’re looking for someone who has already climbed Mount Everest and is winding down graciously. So personalities like the former US secretary of state, Alexander Haig, need not apply. After the attempted assassination of president Ronald Reagan in 1981, Haig allegedly declared: "The helm is right here and that means right in this chair for now." As the credit crunch curdles further, a new concept will haunt bank boards: interim planning and how to make it clear to the chosen interim that his time at the top is temporary. Do say: We value your experience and knowledge of the firm.

Don’t say: We’ll give you a rolling three-year contract.

I hear whispers that a reshuffle took place at Barclays Capital in September. Responsibility for credit trading (including collateralized debt obligations) was removed from co-president Grant Kvalheim and given to that other co-president, the diminutive but dapper Jerry del Missier.

Could it be that one co-president is more in command than the other? Kvalheim retains investment banking, primary capital markets and the loan business. "I’m not sure Grant’s tenure can be taken for granted," a mole murmurs. "After all, he must have been behind the decision to purchase a sub-prime originator at the start of 2007." It is true that Barclays Capital did purchase Equifirst Corporation in January. However, it paid just $225 million. So while the value of that acquisition would probably be marked down to an anorexic zero today, other firms made the same mistake and vapourized much more money.

Another source claims that although no memo was circulated regarding the reallocation of co-presidential tasks, Kvalheim’s future role would include liaising with the mighty (and perhaps ever-so-slightly grumpy) Asian shareholders. "And where does that leave the present head of Asia-Pacific, Robert Morrice [chairman and chief executive of Barclays Asia]?" a source wondered. "Shouldn’t Morrice be the one mollifying the out-of-pocket Asian investors?"

In fact, a spokesperson said that Kvalheim now oversees all Barclays Capital’s American and Asian businesses. In fact in Asia, Morrice will report to Kvalheim for Barcap business. So there you have it. Could things be any more convoluted? And I’m sure Morrice is thrilled about this new reporting line to someone he probably considered a peer. Also, if Barclays’ credit trading business was flourishing, why did president Bob Diamond decide to snatch the poisoned chalice away from Kvalheim and bestow it on del Missier? Answers courtesy of abigail@euromoney.com please.

Is the unravelling of Barclays the biggest story that never happened? Shares in Barclays, the UK’s third-largest bank, have collapsed by 40% this year. On November 9, the shares slipped under £4.50 and were briefly suspended when everyone rushed together for the exit. The shares closed that day at £4.74, which meant they were trading on a P/E ratio of 6.9. The last time the shares stood at £4.70 was August 2004.

When Barclays finally produced a trading statement in the middle of November, the numbers were a lot better than most people expected – an £800 million ($1.64 billion) loss in October, which amounts to total write-downs since the start of the third quarter of £1.3 billion.

So it seems that Barclays, despite its relatively high exposure to all things credit-related, has actually performed rather well. It certainly piles more pressure on Stephen Green, Michael Geoghegan and Stuart Gulliver at HSBC – the bank that makes a drama out of the crisis by writing down a further $3.4 billion in the third quarter in its US consumer finance business, having supposedly capped the losses from its US operations in February.

So why, even after Barclays came clean, are people sceptical about its situation? Barclays’ management only has to look to itself for the answer.

For weeks, it seemed that either John Varley, Barclays’ chief executive, and Bob Diamond had presided over massive shareholder value destruction or Barclays’ press relations department is comparable to Falstaff’s followers: "I did never see such pitiful rascals."

I found it ridiculous that Barclays refused to make an announcement for so long about the size of its investment banking write-downs. The UK banks only report half-yearly but provide quarterly trading updates; Barclays was due to provide a third-quarter update on November 27. On November 9, it leaked that Varley had reassured staff that there was no truth to speculation about catastrophic losses. If Varley could reassure staff, why was he not prepared to reassure shareholders? I have heard it argued that to do this would set an unfortunate precedent and that Varley doesn’t want to mimic what’s been called "Merrill’s mistake". In early October, Merrill Lynch announced that it would write down $4.5 billion on sub-prime exposure. Less than three weeks later, it had to increase that by $3.5 billion.

The shares of Royal Bank of Scotland, Barclays’ British rival, have been pummelled as well – they are now 40% off their 2007 peak. However, sentiment towards RBS is more sanguine. After all they have made a big (and, to my mind, misguided) acquisition in difficult market conditions.

The rumours in the London market are all about Barclays. Hedge funds are in heaven shorting the stock. But many real-money investors have lost their shirts (and perhaps even their underpants) by purchasing Barclays shares this year. A shiver of Schadenfreude darts down my spine as I review the list. In early June, the supercilious Atticus Capital allegedly purchased $1 billion-worth (at about £7.20) and told Varley that if he only pulled his bid for ABN Amro, the shares would finally start performing. By the way, Atticus’s co-chairman, the youthful Nat Rothschild, is related to Marcus Agius, Barclays’ chairman.

In late July, Barclays flogged some £2.5 billion of shares to China Development Bank and Singapore’s Temasek Holdings (again at around £7.20 – not a lucky number for Barclays’ shareholders). A month later, the great and the good of Barclays’ senior management prostrated themselves in front of the runaway lorry. Agius, Diamond, chief executive of global retail and commercial banking Frits Seegers, Varley, and deputy chairman Sir Nigel Rudd all pranced to the dance and bought bundles at a price of about £6.80. Diamond invested £1 million at that price. "That’s a drop in the ocean to what he’s taken out of the firm," another mole grumbled. And finally, the all-seeing Seegers blew another £700,000 in early November – only to see his investment eroded by £100,000 in a week.

If you buy Barclays now, are you catching a falling knife? Two knowledgeable insiders told me to buy before the November announcement – and they would know if there was a black hole. I might be tempted to dip my toe in to the water.

“Isn’t Marcus Agius keeping a low profile? Agius took up his current role in January 2007, and we haven’t seen or heard much from him since. I think this is a shame. In his photographs, Agius, a patrician and impeccably groomed blue-blooded Englishman, looks so sleek, one wants to stroke him”

"Isn’t Marcus Agius keeping a low profile? Agius took up his current role in January 2007, and we haven’t seen or heard much from him since. I think this is a shame. In his photographs, Agius, a patrician and impeccably groomed blue-blooded Englishman, looks so sleek, one wants to stroke him"

Returning to Marcus Agius: isn’t he keeping a low profile? Agius took up his current role in January 2007, and we haven’t seen or heard much from him since. I think this is a shame. In his photographs, Agius, a patrician and impeccably groomed blue-blooded Englishman, looks so sleek, one wants to stroke him. However, I hear that at a London gathering of Lazard alumni in early November, there was much chortling about the fate of their former colleague. Agius’s last role was chairman of Lazard in London. A spy reports: "He was always so beautifully dressed and had such an imperturbable manner that they’re all delighted he’s in big-time poo at the moment!" And you thought investment bankers were mature men rather than fractious children? In early November, I trotted down to Canary Wharf to call on Walid Chammah, chairman of Morgan Stanley International. Walid moved from New York to London in September. The drift of banking senior management back to the old country signifies that revenue generation opportunities outside the US are expanding. I assumed that charming Chammah would be a cheerleader for the industry, proffering a mixture of banality and blandishments. Instead, I found him refreshingly outspoken and unusually incisive about the challenges financial institutions face. "The losses are yesterday’s news," he told me. "The key is which firms have the right model going forward."

Walid is not only a highly respected senior banker (he was formerly global head of investment banking at Morgan Stanley) but he is also reputed to be an FOM (friend of Mack), the born-again chief executive of Morgan Stanley. Inner sanctum is a status that few attain. At Barclays Capital, those who were close to chief executive Bob Diamond were known as Friends of Bob or FOBs. Should those who are close to Brady Dougan, chief executive of Credit Suisse, also be called FOBs? Or maybe FODs would be better in order to differentiate them from FOBs? Am I the only one who finds it intriguing that Bob Diamond and Brady Dougan share the same initials? And can there be any truth to the rumour that a few years ago Bobby D wanted to hire Brady D as his successor at Barclays Capital? Some would argue that Credit Suisse is a safer berth at the moment than Barclays, where some rats seem to be deserting the listing ship. Stephen Whitehead, Barclays’ group corporate affairs director, resigned in late September, after a two-year tenure, to join Prudential plc as group communications director.

And finally, as the festive season dawns, how are you feeling? Will the fourth quarter bring Christmas cheer or cold comfort for market participants? "Bonuses will be a firm-by-firm phenomenon," a mole said smugly. "We will be flat to last year although there are more mouths to feed." Mole’s optimism was shared by another source at an American investment bank. "Most of our businesses are doing well, he says. "The fixed-income losses represent an isolated but humungous piece of the puzzle." I must say I’m more in the Morgan Stanley camp myself. In November, Morgan Stanley’s European research team stated: "We now have serious doubts about the fundamental growth outlook due to the deepening ongoing financial crisis and the apparent reluctance of central banks to cut rates as inflationary risks still loom."

So I’m not expecting bank Christmas parties to be lavish this year. Events will be more "buy your own drink" than "free bar for all and bring a friend". But in a way, is that a surprise? The excesses of last Christmas would be hard to beat. Nevertheless, the Credit Suisse press party was a glamorous affair held in the salubrious surroundings of London’s legal district. I met James Leigh-Pemberton, chairman of European investment banking, and caught up with Fawzi Kyriakos-Saad, chief executive of emerging markets, EMEA region, whom I last encountered when he worked for JPMorgan.

The Société Générale winter press party was held at a new London private members’ club, Shoreditch House, and my mole was delighted by the gift of a cheery red scarf. By the way, it is interesting that the French banks BNP Paribas and Société Générale appear to have escaped the worst of the sub-prime meltdown and took relatively low write-downs in the third quarter. A Société Générale banker joked: "I am lucky that I was a Mickey Mouse in leveraged finance." Finally, my colleagues were bewildered by an invitation from Goldman Sachs to a drinks party on Monday, January 21 2008. "What’s that all about?" one grumbled. "Everyone’s on the wagon in January so obviously it will be a cheap affair. I think I’ll be sorting out my sock drawer that evening."

Please send news and views to abigail@euromoney.com.

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