Abigail Hofman: The loser list

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Abigail Hofman
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The list of badly flawed financial institutions is long: Barclays (crumbling shareholder value), Société Générale (poor controls), UBS (total mismanagement), Lehman Brothers (vainglorious leadership), Bear Stearns (dereliction of management).

In my October column, I was prepared to give Barclays’ president Bob Diamond the benefit of the doubt for purchasing the US operations of Lehman Brothers. Now, I think both he and I were suffering from late summer sun-stroke.

On September 17, Barclays announced it was purchasing a chunk of Lehman Brothers. The press release stated: "The board of Barclays expects these discussions to lead to a subscription of at least £600 million in additional equity. The proposed transaction with Lehman Brothers and the additional equity would result in an enhancement of Barclays’ earnings and capital ratios."

Barclays’ management acted like a feckless teenager: it saw a Prada handbag and pounced on it

On October 13, following discussions with the Financial Services Authority, Barclays announced that the bank would need to raise in excess of £6.5 billion in tier-1 capital. So in less than 28 days, Barclays’ capital need spiralled 10 times. An insider comments: "The FSA came in and subjected our balance sheet to a destruction scenario." On Friday, September 12 (before the Lehman acquisition was fully in the public domain), Barclays’ shares were trading around £3.40. In late October, they trade around £1.90. In other words, senior management has overseen a shocking 40% destruction of shareholder value in six weeks.

A Barclays’ advocate might argue that other major UK banks such as HBOS, Lloyds TSB and RBS have suffered a similar or worse fate. However, I cannot forgive the Lehman acquisition. My parents taught me that if you can’t afford something, you don’t buy it. Barclays acted like a feckless teenager: it saw a Prada handbag and pounced on it. But there was a small problem – when the credit card bill came, they didn’t have the money to pay.

I am not persuaded by arguments such as: "Oh, but Barclays could have bought the whole operation at a much higher price. How clever they were to wait for Lehman to go bankrupt". Or "Diamond recognized that this was a once in the lifetime opportunity". If you buy a Prada handbag in the sale but you don’t have the money to pay for it, you are still irresponsible. I won’t even go into the fact that investment banking as we knew it is over and that recent Morgan Stanley research predicts investment banking revenues for 2009 will shrivel to 2004 levels at best.

Oh, and did I mention that Barclays will not pay a final dividend this year? Which investor wants to hold a non-income-producing share where the senior management strategic thinking can at best be summarised as brave and at worst befuddled. And remember that this was the senior management team (ably assisted by former CFO, Naguib Kheraj, the current chief executive of JP Morgan Cazenove) that was desperate to buy ABN Amro at the top of the market. Doesn’t that show a lack of judgement? Even if you argue that Varley was sane enough to back down as RBS’s gladiator Goodwin marched his troops over the precipice, you can still criticize Barclays for not recognising the peak of the business cycle.

Rumours circulating that Barclays has guaranteed senior Lehman staff bountiful bonuses incense me further. Skip McGee, the former Lehman global head of investment banking may receive as much as $25 million. Barclays refused to comment on compensation. "People who talk about such things don’t know," sniffed a spokesman. "And those who know, don’t talk."

McGee, who one source describes as "quite ordinary", was a member of Lehman’s executive committee. Surely some blame must be attached to an executive committee that steers a firm into bankruptcy, or are we all living in a parallel universe where no one is accountable for anything? So McGee receives a substantial guaranteed bonus and shareholders whistle for their dividend. "Unconscionable" is a word that dances in front of my eyes. A mole murmurs that morale is low among native Barclays Capital staff in New York. The Lehman acquisition is perceived as a reverse take-over. "My blood boils," fumes mole, "when these guys come into my office, put their feet on my desk and start lecturing me about the need for team spirit."

Barclays' strategy

So how is Barclays planning to navigate its way through the Straits of Scylla? The bank says it will raise £3 billion of preference shares by December 31 and £3.6 billion of ordinary shares by March 31 2009. Its refers obliquely to £1 billion committed "in principle by an existing shareholder". I assume this is a reference to the Qatar Investment Authority.

Would that be the same generous sheikh who at the end of June, valiantly purchased over £2 billion of Barclays’ shares at an approximate price of £2.80. A rival chief executive looked concerned: "You have to feel empathy for Barclays’ senior management. Their travel schedule during the weekend of October 10 was punitive. Friday in Washington for the IMF, Saturday summoned home by Gordon Brown, Monday in Qatar to request money from the sheikh. It’s in that sort of situation, you really miss Concorde."

The other thing that I don’t like about Barclays’ strategy is the uncertainty. In these markets, uncertainty is anathema. This capital raising question may lurk over Barclays until next March. Meanwhile, virtually every other major financial institution has addressed their capital problems. And prospects for Barclays’ businesses will not improve in the next six months as the financial crisis subsumes the real economy: think declining property prices, credit card defaults, corporate bankruptcies, more investment banking write-downs and declining investment banking revenues.

It should of course be remembered that so far, in this current cycle, Barclays has not reported a loss, unlike some other banks. However, 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 and participate in a government bail-out. In that case, Agius, Diamond and Varley will have to resign.

The question then becomes: who do you appoint instead? Firstly, when it comes to senior management, three’s a crowd. You need a chairman and chief executive. A president is superfluous. Secondly, the Barclays board should follow the example of RBS and appoint potential successors to the board now. Current RBS CEO Stephen Hester was appointed to the RBS board in late August 2008. Fred Goodwin resigned in mid-October.

This column has some potential successors in mind. "There are so few left standing," a mole moans. But maybe you have your own suggestions, so what do you think? Oh, and my first piece of advice for the new management team would be: "You need to sack 8,000 of the 10,000 Lehman employees in order to size the cost base to the future revenue stream." Barclays is due to issue a third-quarter trading update on November 18. This should clarify some of the questions swirling around the firm.

HSBC: The bankers' bank

It didn’t have to be this way. Consider another British bank that has been a winner in this vortex of volatility: HSBC. I may have chastised HSBC’s dour Scottish management in the past (especially as regards the Household acquisition). However, panning the camera back, they have acquitted themselves well. HSBC caused spluttering and finger pointing in February 2007 when they issued a profits warning because of problems in their US operations.

I recall sitting down last June with Stuart Gulliver, HSBC’s head of corporate and investment banking. Stuart told me that following the departure of investment banking co-head John Studzinski to Blackstone, the investment bank’s strategy had changed. Gulliver’s aim was to develop an investment banking operation to complement HSBC’s strengths in emerging markets rather than to aggressively pursue traditional merger and acquisition business where HSBC would always be at a disadvantage compared with firms like Goldman Sachs or Morgan Stanley. How sensible.

This year, as investment banks were desperate for well capitalised suitors, HSBC refused to fall in love. And almost every senior banker I know keeps their own money in an HSBC account. Perhaps HSBC should consider changing its advertising slogan from "The world’s local bank" to "The bankers’ bank". By the way, a mole whispers that Stuart Gulliver might be the next chief executive of the HSBC group when the incumbent, 55-year-old Mike Geoghegan moves on.

Surely, activist investor Knight Vinke now looks misguided. Knight Vinke launched a campaign against HSBC last autumn. Today, KV looks far from prescient. It is humiliating to attack one of the handful of banks that has adroitly surfed the credit crunch. Mr Knight would have looked more insightful if he had gone after Barclays (crumbling shareholder value), Société Générale (poor controls), UBS (total mismanagement), Lehman Brothers (vainglorious leadership), or Bear Stearns (dereliction of management). The list of badly flawed financial institutions is long. However, it is difficult to argue that HSBC should be on that list.

RBS: Sir Fred Goodwin's place on the loser list

A leader on the loser list would have to be Sir Fred Goodwin, the former chief executive of RBS. In September, I savagely attacked Goodwin for clinging on to office by his toe-nails. I am delighted he has gone, although the manner of his going was disgraceful. Effectively, he was ejected by the saintly Hector Sants, chief executive of the FSA, because the RBS board were incapable of taking tough action. Goodwin departed with a fat pension pot and absolutely no contrition. His successor Stephen Hester, a career banker and former chief executive of British Land, is not universally loved but is grudgingly respected, which makes him the perfect choice for a credit crunch chief executive.

I was shocked when I wrote my ‘Shred Fred’ piece to learn that RBS senior management still enjoyed the privileges of a corporate jet. An insider tells me that even though the UK government will have a substantial stake in RBS, the jet is still in its hangar. I feel an urge to call the Number 10 hot-line or perhaps I should petition the RBS board for use of the aircraft given my fractional ownership as an over-burdened UK taxpayer.


Pithy pearls of wisdom from the IMF and World Bank meetings
The weather in Washington for the 2008 annual meetings of the IMF and the World Bank was steadfastly sunny, but sentiment was universally despondent. As bankers, politicians and regulators gathered during the weekend of October 10, global stock-markets lurched vertiginously down, money market rates reached a horrible high and western capitalism looked poised to fail. A few incidents from that weekend remain in my mind.


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