Abigail Hofman: Rarely have so many waited with anticipation for so few

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By:
Abigail Hofman
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I do expect some tales of woe. I am nervous about UBS and Deutsche and concerned about Merrill.

It is always unnerving to open the Financial Times and see a large photograph of a former colleague glaring back at you. In this case, the former colleague was wreathed in smiles, which made the experience more galling. Eric Knight, chairman and chief investment officer of activist fund Knight Vinke Asset Management, was a ubiquitous press presence after calling for a strategic review of HSBC in early September.

I’ve done some savaging of HSBC myself so should have some sympathy, if not empathy, for Knight. In January, I wrote: "A break-up of HSBC is certainly an interesting idea for 2007." Great minds think alike. I worked with Eric when I was a pert young analyst at Merrill Lynch in the 1980s. Pert is perhaps not the appropriate adjective to describe Eric in those days. Although I do remember he was always perfectly attired. And as he has aged – dare I say it – hasn’t the resemblance to Miss Piggy grown? Although personally, I think all women should strive for fat faces. The sunken, starved look is so ageing.

On September 4, Eric wrote a letter to Stephen Green that I’m sure caused the HSBC chairman to fling his arms in the air and wail (think Victor Meldrew in One Foot in the Grave): "I don’t believe it." The letter is pompous, patronizing and punchy. Unfortunately, it is also systematic, rational and lengthy. I commend it as an example of how to vanquish an enemy with weasel words. Eric wrote: "The fact which troubled us most following KVAM’s meeting in June [with HSBC] was our feeling that there appeared to be little sense of concern within management about the performance of the Group – almost to the point of complacency – and a fundamental lack of ambition." Although Knight Vinke has status in the field of shareholder activism, it is a minnow in terms of money management. Sources whisper that Knight has some $1.5 billion under management. However, Calpers, the muscular California pension fund, co-signed the letter, which lent the attack added acidity.If you want to humiliate and irritate someone, ignore them. Eric essentially argues that Stephen should get lost or at least become non-executive (which is probably the same thing) and that a strategic review of the group should be conducted by Simon Robertson, the senior non-executive member of the HSBC board. Robertson, a highly respected former Goldman Sachs banker and the present chairman of Rolls-Royce, can’t be happy. The 66-year-old has a busy life. Apart from being the founder of Simon Robertson Associates (his own corporate finance boutique, which sounds very impressive, if not hubristic), he is a non-executive director of wine-merchant Berry Brothers & Rudd, the Economist and the Royal Opera House. In other words, Simon is a member of the great and the good. It is rumoured that he skis with the royal family in Klosters. A former colleague talks admiringly of the "Robertson aura". I wonder how much patience the robust Robertson will have for erudite Eric’s antics?

Nevertheless, the predator makes two killer points. First, that "the world’s local bank" is a pseudonym for a motley collection of middling to minor operations: "With the exception of retail banking in Hong Kong, HSBC has failed to achieve a position of true leadership in any of its core markets or businesses despite having spent about $40 billion on acquisitions in Europe and North America over the past 15 years."

And secondly, that HSBC should have focused on consolidating and expanding its Asian business. "HSBC’s rush for ‘diversification’ may have damaged its core franchise in Hong Kong and compromised its opportunity of being the leading player in China," scolds Knight with some justification. He also points out that "Despite having the largest branch network in China amongst the foreign banks, [HSBC] is not even among the top 10 lead managers of IPOs for mainland Chinese companies." HSBC argues that it ranks seventh, year to date, for Chinese IPOs. Last year it was poorly ranked because there was a plethora of Chinese bank IPOs and these banks viewed HSBC as a competitor.

Timing is everything in finance as it is in life, and angry Eric’s timing is askew. In February, when HSBC issued its first ever profit warning because of US subsidiary Household’s sub-prime lending, the bank looked a buffoon. Commentators and shareholders waded in to pummel the wounded boxer as he crouched off-balance in the ring. Now, though, that everyone else is grappling with demons that come garbed in acronyms such as CDOs, SIVs and LBOs, HSBC seems a bastion of purity in an impure world. At least we know they’re not going under. I’ve lost count of the number of people who have rung me and said that they are going to transfer their savings from other banks to HSBC.

Perhaps sensing this change of mood, Robertson has told Knight that HSBC’s non-executive directors unanimously support Stephen Green as executive chairman and believe there is no need for a strategy review. Nevertheless, a cursory scan of the non-executive directors caused me to shake my head sorrowfully. The board is unwieldy (17 people) and is packed with 60-something white males to whom the application of the word conservative would be progressive. My heart goes out to lovely Rona Fairhead, chief executive of the Financial Times Group, who is one of two female non-executive directors of HSBC. And all I can say to Eric Knight, my former comrade-in-arms, is: "Good luck, mate, you’ve got a long campaign ahead of you."

"It’s third-quarter results time and, once again, Goldman Sachs proved itself to be a class act. Investors should kiss the ground that Lloyd Blankfein walks upon. Goldman’s third-quarter net income rose by 80% as it bet against sub-prime mortgages"

"It’s third-quarter results time and, once again, Goldman Sachs proved itself to be a class act. Investors should kiss the ground that Lloyd Blankfein walks upon. Goldman’s third-quarter net income rose by 80% as it bet against sub-prime mortgages"

Rarely have so many waited with anticipation for so few. I am not referring to some obscure sexual ritual. Rather, I am talking about the third-quarter results reported by several US investment banks in mid-September. Once again, Goldman Sachs proved itself to be a class act. Investors should kiss the ground that Lloyd Blankfein walks upon. Goldman’s third-quarter net income rose by 80% as it bet against sub-prime mortgages. And how lucky (or should that be smart?) to be able to record a $900 million gain from the sale of one of its equity investments – Horizon Wind Energy. Goldman’s return on equity jumped to 31.6% from 20.9% last year. Of course, one must remember that the third quarter last year was not pretty either as stock markets fell precipitously. Nevertheless, I think when all the banks have reported, it will be very clear that Goldies is still "leader of the pack".

Bear Stearns, however, is having a horrible time. For a firm whose reputation was built on its fixed-income prowess and skills in the mortgage market, this is bizarre. In August, Bear’s president, Alan Schwartz, apparently told 50 top executives: "These are the types of markets in which Bear Stearns excels." The slavish bankers then burst into jubilant applause and James E Cayne joined in.

Bear’s fixed income third-quarter net revenues dropped by 90% to $118 million. Investment banking net revenues were slightly less meagre at $211 million. I didn’t even know Bear had an investment banking division. One analyst wrote: "The best thing for Bear is that the quarter is over... having just turned in the lowest quarterly ROE (5.3%) our records show, we believe Bear’s situation can likely only improve." That’s as may be but I believe golf fanatic Jimmy Cayne took his eye off the ball. In future, I might have to call him Calamity Cayne.

And as for my friends at Lehman Brothers, I was surprised that their performance was so creditable. They had fewer leveraged-loan commitments and more diversity in their businesses than pessimists had feared. Net income for the third quarter was down a mere 3% on last year. Equity capital market net revenues soared 64% compared with last year and investment banking net revenues were up 48%. The equities business exceeded $1 billion in net revenues for the third consecutive quarter. If this is Armageddon, give me more. The US investment banks have benefited from the recent adoption of arcane accounting conventions FAS 157 and 159, which mean they can book accounting gains when marking to market their own liabilities.

European banks will normally not have this advantage. If there was a large unexploded bomb out there, we would have heard about it by now. However, I do expect some tales of woe. I am nervous about UBS and Deutsche and concerned about Merrill. All these results will trickle out from mid-October onwards.

My starry-eyed ingénue hero-worship of Merrill chief executive Stan O’Neal has suffered a setback. In late June, Stan spoke at the Euromoney Forum and stated that problems in the sub-prime mortgage area were "reasonably well contained" and not affecting other sub-sets of the bond markets. These words seemed optimistic as July slipped in to August and market after market fell over with domino-like efficiency.

I was discussing this incident with my friend savvy Susan, who runs a venture capital fund. "Abigail," she chided. "What else was Stan meant to say? He has to be a cheerleader for the industry. And besides, he’s very cute." I have commented in previous columns on the manly good looks of Merrill’s top team. Another source was quite surly: "Because of you," he grumbled, "Stan O’Neal, Greg Fleming [Merrill’s co-president] and Andrea Orcel [Merrill’s global head of origination] all think they’re matinee idols."

I would point out that my remarks are restrained compared with those of fellow female columnists. In September, the sultry Portuguese football manager José Mourinho left Chelsea football club after falling out with its owner, Roman Abramovich. The female press turned hysterical. For years, they had suffered their menfolk ogling television as gangs of sweaty, unappealing men charged around a muddy field in search of a ball (or is that rugby?). Finally, during the José era, these women had something to ogle themselves. And now, "The Special One" was gone. Result: mass hysteria. Alison Kervin wrote in the Daily Telegraph: "How will we replace this entertaining, contrary and exhilarating being with his Hollywood good looks and sexy accent?" While Guardian columnist Zoe Williams dispensed with decorum altogether: "What are those nipple-shaped features under his jumper that look just like nipples? No... no, it cannot be... he is wearing that cashmere without a vest!" Steady on girl!

Nevertheless, it is intriguing how some men ooze sexuality while others have the appeal of a maiden aunt. Of course, money and power are old-fashioned aphrodisiacs. I like decisiveness as well. So I was pleased to see Roberto Isolani, UBS’s head of fixed-income capital markets, making a bold move and parting company with Paddy O’Brien, Philippe Jordan and Andreas Schlotter. The new management team comprises two women, Allegra Berman and Mahnaz Safa, who become co-heads of European corporate DCM.

Another woman whose star is rising is Erin Callan. Last week, it was announced that Callan will take over as Lehman Brothers’ chief financial officer in December. And I recently met the glamorous Anita Nemes. Anita is a managing director and co-heads prime brokerage sales at Merrill. Originally from Hungary, she struck me as hungry as a horse but nice with it. I will watch the trajectory of her career with interest.

The investment banking world is a tight-knit community and when someone exits stage left it can feel as if a member of the family has gone missing. I have often been asked: "What is Richard Johnson doing now?" Richard was UBS’s legendary head of syndicate in the late 1990s. He was one of the great traders. A friend relates that when Johnson resigned from UBS in 2003, he called the sterling trader, asked him the price of his positions and then bought the whole lot for the Johnson personal portfolio. Well, Richard has spotted another trade he likes. This summer, as markets were plummeting and the weak-hearted were weeping, Johnson was putting the finishing touches to his property hedge fund, Ascania Capital.

Ascania will invest in residential apartment buildings in central Berlin. "By the time the fund is 100% invested the portfolio will have over 1 million square feet of property," Richard told me. The fund, which targeted highly sophisticated investors, closed in late August at around €40 million. Apparently, the German property market has been negatively correlated with other property markets over the past 20 years. You can buy pre-war apartment buildings in Berlin at half the cost of construction and achieve near 100% rental occupancy with gross rental yields of 7.5%. Now there’s a joyous thought! I look forward to seeing how Mr Johnson’s family of funds fare. Fund 2 will be launched later this year.