Abigail with attitude: More zeroes than heroes

COPYING AND DISTRIBUTING ARE PROHIBITED WITHOUT PERMISSION OF THE PUBLISHER: CHUNT@EUROMONEY.COM

By:
Abigail Hofman
Published on:

Beleaguered Barclays, Delphic Deutsche, bank bonuses and preempting press releases.

 
Abigail's biography

Barclays
Since announcing its Arabian adventure, Barclays has suffered an avalanche of negative press coverage. I will therefore limit my comments to a few pertinent points.

Deutsche Bank
Is it my imagination or have you noticed how low key the good Germans have become?

Bank bonuses and corporate hospitality
Corporate hospitality is a receding memory. I was not surprised that the Morgan Stanley London press reception was so well attended. 

‘Marry in haste, repent at leisure.’ 
Why are these bankers announcing appointments before the deal has been approved by shareholders?


Barclays

I was wrong yet I was right. In my November column, I criticized Barclays’ decision to spurn the government’s bail-out package. I wrote: "If the worst comes to the worst (which it could) and Barclays can’t raise capital in the elongated elected time-frame from the private sector, it will have to prostrate itself before Gordon Brown."

Two days after the magazine went to press, Barclays announced that it was raising £7 billion of capital from Abu Dhabi and Qatar. So far, so good. The only problem is that the reserve capital instruments are very expensive (Barclays is paying a coupon of 14% for 10.5 years and offering the Arabs warrants) and more expensive than the money on offer from the UK government. The capital-raising also spat in the eye of substantial UK shareholders that were not offered a chance to participate, in breach of the pre-emption convention.

It is not my policy to kick those who are in agony rolling in the mud. I prefer to be in the vanguard of assaulting the unassailable rather than throwing tomatoes as the mob’s mood turns ugly. Since announcing its Arabian adventure, Barclays has suffered an avalanche of negative press coverage. I will therefore limit my comments to a few pertinent points.

  • Roger Jenkins, chairman of Barclays Capital in the Middle East, was heavily involved in raising the money. Shortly after the transaction was announced, he told the Sunday Times: "I think the share price reaction has been a bit harsh. It has been a tremendous success to raise the capital at all in the current environment." Jenkins is missing the point. A prudent management team does not put itself in a position where it has to raise money in extraordinarily adverse market conditions.

  • The media salivated about the blonde woman at the centre of the story: Amanda Staveley. Staveley, who in the past has managed a restaurant and dated Prince Andrew, runs an advisory boutique and acted for Sheikh Mansour. PCP Capital Partners, her company, will apparently receive £110 million in commission but might only retain £40 million of this booty. So where did the rest of the suffering shareholders’ funds end up? I think we should be told.

  • This latest capital-raising has been another blow for existing shareholders, which have been hammered by an unholy alliance of the three Ds: dilution, dwindling share price and no year-end dividend. Barclays’ chief executive, John Varley, and its president, Bob Diamond, have now said that they will forgo bonuses for 2008. But I presume Roger Jenkins will be in line for a hefty pay-out. After all, he can claim that he saved the bank from the suffocating embrace of the UK taxpayer. Some might argue that he was the banker who broke the bank. In other words that the Middle Eastern exercise finally made people question whose interests Barclays’ management were protecting: their own or their shareholders’.

The past year has pummelled us all. However, those who will live to fight another day are those who maintain their credibility. Varley’s credibility has been badly damaged – not least because Barclays has undertaken four capital-raisings in 15 months. In August 2007 China Development Bank and Temasek invested €3.6 billion at a punchy share price of £7.20. Today, the shares touched an all-time low of £1.20. I shudder to think of the glacial atmosphere when the Asians come to tea to discuss their strategic investment.

Barclays announced in its recent interim management statement that "group profit before tax for the nine months ended September 30 2008 was slightly ahead of 2007". Isn’t that baffling? We all know that some very clever people work at Barclays but are they the brightest people on Wall Street? I can’t think of another big financial institution that has reported a higher profit for 2008 than 2007: not Credit Suisse, Goldman Sachs, HSBC, JPMorgan or Morgan Stanley. Although it is good to be an outlier, being that much of an outlier is odd.

In November, I also criticized Barclays for purchasing a haunch of bankrupt Lehman and bloating headcount just as the investment banking industry was heading for the incinerator. My hunch is that Varley cannot say no to the charismatic Diamond. But Varley’s job is to lead not follow. In the past month, banking lay-offs have ballooned and the atmosphere on trading floors has gone from sombre to suicidal. So for Barclays to have added 10,000 more bodies in September hints at bad timing, bad judgement or just bad luck. A mole makes an interesting point. Barclays employed nearly every one who worked for Lehman’s US operation but bought only a very small proportion of the Lehman balance sheet. So effectively there was a disconnect at the outset: the Lehman balance sheet supported the employees in their various functions (for example, leveraged loans or prime brokerage). If these individuals don’t have access to the money, the amount of business they can write will be constrained. Moreover, the Lehman model was highly dependent on leverage, and now leverage is as redundant as fiscal restraint. I therefore expect many more redundancies at Barclays Capital.

At one time, Jain was viewed as a strong contender to succeed Deutsche’s chief executive, Josef Ackermann. Today, these chances look as if they have been knocked for six

 

Deutsche Bank

It is a relief to turn from beleaguered Barclays to Delphic Deutsche Bank. Is it my imagination or have you noticed how low key the good Germans have become? In February 2006, I remember seeing a prominent Financial Times piece about Anshu Jain, the co-head of Deutsche’s investment bank. The article, ‘Deutsche Bank’s pioneer shows his strength’, was fulsome in its praise of the investment bank where profits for 2005 had risen to €4.8 billion (up 50% on 2004). I re-read the article with a wry smile. "Mr Jain remains the star. His operations are reckoned to contribute a good half of Deutsche’s underlying group profit... Analysts applaud him for pioneering the trend away from standard credit default swaps and towards complex pooled derivatives, such as collateralized debt obligations, which can be used to fine-tune the risks of an investor’s portfolio on one side and generate bigger, more stable profits for the bank on the other." Jain is quoted as insisting that Deutsche makes only 15% of its profits from bets and 60% from "clever stuff", apparently double the amount other investment banks make from clever stuff. And Jain envisaged a rosy future for his troops: "First he sees growth opportunities in the US... and in developing economies, such as South Africa, Russia, Turkey, India and China – but also in product areas such as mortgage-backed securities." At the time, Deutsche’s share price hovered around €90. Today it closed below €20. Perhaps not so clever?

From that article, one would assume that, at the peak of the market, Jain believed that Deutsche was insulated from any market downturn. Of course, Jain was not alone in his view. Very few senior managers predicted the calamitous reversal of the cycle. But hang on a minute, wasn’t Anshu meant to be much brighter than the rest of us?

Deutsche’s investment bank has made a loss for each of the past three quarters and so far this year has lost nearly €1.9 billion. I’m not sure even the most sympathetic commentator would classify that as clever. Deutsche has announced write-downs in the investment bank of approximately $11 billion. However, in the third quarter, the bank had a change of heart and made use of a new accounting rule to reclassify almost €25 billion of assets, so avoiding a €845 million hit to revenues. This enabled Deutsche to record a profit for the third quarter of 2008 instead of a loss. Perhaps that was clever? Nevertheless, UBS, when it reported its third-quarter profits, refused to make use of the same convention on the grounds that "investors would see through it". Rajeev Misra, Deutsche’s head of credit, left the firm in June 2008. Sources insist that he left of his own volition. However, third-quarter results refer to trading losses of €873 million in credit proprietary trading. I wonder who is to blame for that? An insider insists: "Deutsche has been a relative outperformer during this crisis. And if you look at the most recent results for the fixed-income sales and trading area (run by Jain), revenues were up 60% on last year."

Deutsche, alone of the big banks, has not raised significant additional capital. However, its decision in September to purchase about 30% of Postbank is a tacit recognition that the quest for "clever stuff" is over. Never have slender but transparent returns from retail banking looked so attractive. Jain and his co-head of the investment bank, Michael Cohrs, are both still members of Deutsche’s global executive committee. It is good to know that, despite the poor market conditions, Jain has time to focus on things outside work. A passionate cricket fan, earlier this year he purchased a stake in an Indian Premier League cricket team. Is that perhaps a hint that he sees his future in India rather than Europe? At one time, Jain was viewed as a strong contender to succeed Deutsche’s chief executive, Josef Ackermann. Today, these chances look as if they have been knocked for six.

Is forgoing your bonus the new black?

To be fair, Deutsche Bank started the trend. In October, its most senior executives announced that they would follow Ackermann’s lead and go without this year. Since then a veritable banish bonuses party has broken out. Goldman Sachs was next to the fray. And, as only Goldman can, it presented the message in as sanctimonious a fashion as possible. It ruminated: "It is the right thing to do. We cannot ignore the fact that we are part of an industry that is directly associated with the ongoing economic problems." UBS joined in. Apparently its chairman, Peter Kurer, is never going to receive a bonus. Finally, Barclays’ senior management limped on to the dance floor in penitent mood. We’re now at the stage where if you are paid a bonus this year, you’re quite simply not important enough. Nevertheless, big producers will continue to be rewarded. The myth prevails that good people always have alternative job offers. The bonus round this year would be amusing if it weren’t so depressing. Senior management with tight smiles will hand out envelopes to underlings and then scuttle back in to their offices before the mutinous troops start screeching: "Please sir, can I have some more?"

Of course, Christmas has officially been cancelled and corporate hospitality is a receding memory. I was therefore not surprised that the late-October Morgan Stanley press reception at the Wallace Collection in London was so well attended. Champagne was plentiful but canapés were scarce. Many senior Stanleyites were there, including the charming co-president, Walid Chammah, and the talented co-head of global investment banking Franck Petitgas. I was impressed by Morgan Stanley’s chief financial officer, Colm Kelleher, who was both articulate and amusing. Although he must have been under a lot of stress during the preceding month, he seemed much more relaxed than the journalists swarming around him.

Talking about individuals who are excellent company, I am delighted that Jean-Pierre Mustier, the former head of Société Générale’s investment bank, has a new role. He recently took over the bank’s amorphous asset management franchise. "He’s obviously ferociously intelligent," a mole whispers. "I assume he’s really going to shake things up." Next year it will also be interesting to see how the French firm’s investment bank fares under its new leader, ex-Bear Stearns employee Michel Péretié. I was also intrigued to learn that Société Générale has a woman, Diony Lebot, in charge of its Americas operations.

‘Marry in haste, repent at leisure.

Someone else who might have a new role is Andrea Orcel, the global head of origination at Merrill Lynch. A press release crossed my desk announcing that in the new Bank of America/Merrill Lynch line-up, Orcel will be president of international banking, securities and wealth management. The press release continues ominously: "This is one in a series of communications as a result of the Bank of America-Merrill Lynch merger." I am slightly bemused. Why are these enthusiastic bankers announcing appointments before the deal has been approved by shareholders? A mole murmurs that Ken Lewis, saviour of the world on September 15 when he agreed to purchase Merrill, is peeved that today Merrill’s chief executive, John Thain, is receiving all the plaudits. Might Ken be tempted to renegotiate or pull back given the terrible market conditions? I’m afraid it is a case of: ‘Marry in haste, repent at leisure’. Can you imagine the lambasting Ken would receive from Hank if he were tempted to demur? "Please get lost," Paulson would fume. "You gave us your word. So get on with it and stop being so un-American." An assistant pops her head round the door : "Mr Secretary, I’ve got Robert Nardelli of Chrysler on the line, shall I put him through?" And so ends the wobble of Ken Lewis.


This is my last column for 2008. For financial markets and financial firms, it has been a slow, agonizing grind downwards. The crisis has produced more zeroes than heroes. And the unimaginable has occurred. As the magazine goes to press, stock markets are re-testing their lows for the year and credit markets are once again in crisis. "This will turn around next spring," a source said. "By then, not one person will have a scintilla of hope left." I for one am thrilled to see the back of 2008 and I wish all my readers a very prosperous, healthy and happy 2009.

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


See more from Abigail Hofman