Abigail Hofman: The credit crunch tornado
The credit crunch has been a tornado that has shown no regard for the reputations of formerly revered individuals.
Stars of the industry such as Stan O’Neal, Chuck Prince, Zoe Cruz and Jonathan Chenevix-Trench have plunged into the abyss of has-been land. However, I am also underwhelmed by the performance of two individuals who are still employed: the UK chancellor of the exchequer, Alistair Darling, and the governor of the Bank of England, Mervyn King.
The Abigail with Attitude column calls for the heads of both Alistair Darling and Mervyn King. A source sniffed: "I would name Mervyn King as one of 2007’s biggest losers"
Darling and King (or should one allude to them as a joint entity – Darling King?), are embroiled in the unsavoury Northern Rock saga.
Last autumn, we were treated to the unedifying sight of Northern Rock depositors (some in wheelchairs) queuing for hours to retrieve their life savings. Darling then woke up to the fact that depositors are voters too and did a volte-face. On September 17, it was announced that all retail deposits in Northern Rock were safe. So from being the most risky place in Britain to have your money, it became the safest place to have your money. However, by guaranteeing Northern Rock deposits the chancellor was implicitly guaranteeing the savings of all other depositors with British banks. How could he justify differentiating between institutions? Northern Rock – fine; Alliance & Leicester – not fine? So effectively, UK banks are now quasi-nationalized entities. The downside is with the taxpayer, the upside with management, shareholders and, of course, depositors. Isn’t that a little bizarre?
To date, the government has pumped more than £50 billion ($97.4 billion of taxpayers’ money into Northern Rock without nationalizing the institution. The authorities bumbled along for four months and appeared to lack a definitive plan for recouping these funds. Attempts to lure suitors to take over the troubled and troublesome lender meander on. And now we hear about possible Rock bond issues guaranteed by Her Majesty’s Government in an attempt to salvage something from the rubble.
The unravelling of Northern Rock has been appallingly mismanaged by the UK authorities. The Abigail with Attitude column calls for the heads of both Darling and King. A source sniffed: "I would name Mervyn King as one of 2007’s biggest losers. King was the only major central banker to have lost credibility during a time of crisis and he caused the first run on a bank in the UK for over a hundred years." A New York-based chief executive was more measured: "Before all this, London was considered the model for a regulatory framework. Northern Rock obviously fell through the cracks and reveals a weakness in the system." It is undoubtedly true that accountability was blurred by the fact that three bodies were involved in the crisis: the Bank of England, the Financial Services Authority and the Treasury. In early January 2008, Darling set out a plan to improve British banking regulation. This might prevent another high-profile mishap but it cannot salvage the blemished reputation of London as a financial centre.
It might sound petulant but I am bored with being right all the time. As long ago as July 2006, I criticized UBS for permitting John Costas, the former head of the investment bank, to form an in-house hedge fund (Dillon Read Capital Management). And in December 2006, I said that Credit Suisse was starting to look a more impressive institution than UBS. Now I have been vindicated and everyone else is leaping on the bandwagon. The Financial Times devoted a whole page to this topic last November and the Wall Street Journal flogged a dead horse three weeks later when it ran an article entitled: "Credit Suisse hits stride."
UBS is still dealing with the aftermath of Costas’s dreadful dalliance with "absolute returns". Numerous top executives have been ousted (including Peter Wuffli, the bank’s former chief executive), there have been write-downs of $14 billion ("How can a supposedly conservative Swiss bank lose so much money?" one source wailed), and controversial capital injections from Singaporean and Arab investors. Some say that unless things improve rapidly, UBS’s chairman, Marcel Ospel, might also have to leave the firm. "In a way, they sacked Wuffli and [Huw] Jenkins [head of the investment bank] too soon," an outsider opined. "Now as the losses mount up who are they going to blame? And I wouldn’t be surprised if there is more pain to come."
Forty-three-year-old Marcel Rohner, UBS’s chief executive appointed last July, is not only struggling with major group issues but is also acting as the temporary chief executive of the investment bank. That is too much for any man (or woman): focus brings results, flitting hither and thither can be unproductive.
My sources tell me that a permanent chief executive of UBS’s investment bank will be appointed soon. The short list is said to include Tom Maheras, formerly of Citi; Thomas Montag, ex-Goldman; and various internal candidates such as Andre Esteves, Joe Scoby, Rory Tapner and Robert Wolf. Whoever is appointed will have a very demanding job: a head hunter would talk euphemistically about "challenges". I might use the words "land mines".
For all that, I don’t think that the life of Credit Suisse’s cerebral chief executive, Brady Dougan, is a bed of roses either at the moment. I doubt that he is skipping round his spacious corner office or turning somersaults of glee down the Bahnhofstrasse. Consider the third-quarter results of the two Swiss banks. Credit Suisse announced a pre-tax profit of SFr2.03 billion ($1.86 billion) from continuing operations, UBS had a pre-tax loss of SFr726 million. UBS’s share price is down about 46% from its 2007 peak, Credit Suisse’s is off 42%. Shouldn’t that differential be wider? Dougan, who by all accounts is a very impressive individual, maintains a low profile and might need to do more flesh-pressing with the press in order to reinforce the Credit Suisse brand.
Credit Suisse’s "one bank" strategy has been an unequivocal success. Nevertheless, its businesses face headwinds. In the third quarter of 2007, the asset management operation suffered from dislocation in its US money-market funds, staff turnover and declining margins. David Blumer, the youthful head of asset management, might find 2008 tough going, although sources report that he is building a strong alternative investment franchise. The private banking division had an excellent third quarter. However, Credit Suisse still limps in a poor second compared with UBS’ fabulous wealth management business. Dougan and Walter Berchtold (Credit Suisse’s private banking chief executive) need to close this gap while UBS is facing a maelstrom of adverse publicity.
As regards investment banking, Credit Suisse is to be congratulated for avoiding the worst of the sub-prime fallout (in the third quarter it wrote down SFr1.1 billion in its structured product area). But the bank is a top player in leveraged loans. An insider argues that leveraged lending and commercial property lending are less risky than sub-prime: there is greater transparency and you can identify the business or entity that you’re dealing with. At the end of the third quarter of 2007, Credit Suisse had outstanding funded and unfunded non-investment-grade loan commitments (both bridge and syndicated) totalling SFr60 billion. That’s a big number and could spell trouble for the firm. I like and respect Paul Calello, who heads Credit Suisse’s investment banking operation. My gut instinct is that Calello runs a tight ship and this exposure will have been managed down during the fourth quarter of 2007.
I will therefore be fascinated to see the fourth-quarter results for Credit Suisse (announced on 12 February) and for UBS (due on 14 February). So while the rest of you are thinking about red roses, pink champagne and black fishnet stockings, I will be the sad individual poring over Swiss financial statements on Valentine’s Day.
And talking of sad, I am crestfallen that I did not attend the World Economic Forum in Davos. "Abigail, you are missing nothing," one chief insisted. "Davos is merely an opportunity for the self-important to sit around feeling self-important." He might have a point. Despite the immense losses that financial institutions suffered last year, some senior managers seem to be in denial and are refusing to part with their perks. I wonder how many bank chiefs travelled to Davos on a commercial airline. Very few I imagine. Most will have swooped in by private jet. Indeed, I am starting to suspect that many banking chiefs have forgotten what the inside of a regular Boeing 747 looks like. Can it be true (as a mole whispers) that one legendary financier boasted proudly to his subordinate about the flexibility of the seats in his private jet? "Look," proclaimed the legendary one, "these seats actually go all the way back so you can lie flat!" One doesn’t know whether to laugh or cry – reclining seats are practically universal in most airline business class cabins today. Next month, the Abigail with attitude column will delve deeper in to the controversial topic of pampered bankers and their private planes.
My list of top London financiers caused consternation last month. I was deluged with calls from carping detractors querying why they had not been included. Some bankers claim that a low profile is invaluable. However, many more equate profile with posterity. "I don’t care what you write about me," one nominee grovelled, "as long as you write something." I complete the alphabet below.
"Jeremy Isaacs has the ability to make you feel as if you’re the only person in the room," enthuses one mole. "Think 1,000 watt charm"
Jeremy Isaacs (43) – chief executive, Lehman Brothers, Europe and Asia. Charismatic, approachable and blessed with a great sense of humour: "Jeremy has the ability to make you feel as if you’re the only person in the room," enthuses one mole. "Think 1,000 watt charm." Isaacs, who is an equities specialist, joined Lehman from Goldman Sachs in 1989. He has expanded Lehman’s international franchise to the point where non-US revenues exceeded 60% (fourth quarter 2007). The key question is what is the next career move for Isaacs, who has been in his current role for several years?
Anshu Jain (44) – co-head of Deutsche’s investment bank. An Indian who was educated in America, Jain followed his former boss, Edson Mitchell, to Deutsche Bank in 1995. Highly intelligent but can come across as arrogant. Some say that Jain will be the next chief executive of Deutsche when Josef Ackermann retires (scheduled for 2010), others that Jain might get bored with waiting and leave to form his own hedge fund.
David Mayhew (67) – chairman, JPMorgan Cazenove – a dignified British corporate broker. Upper class: "His blood is bluer than blue," a mole whispers. Is rumoured to rear cattle in his spare time. In 2004, Mayhew engineered the sale of Cazenove (the Queen’s stockbroker) to JPMorgan and has never looked back. Very well connected with FTSE top 100 chiefs.
Jean-Pierre Mustier (47) – chief executive of Société Générale’s corporate and investment bank. Mustier divides his time between Paris and London. Educated at the elitist French Ecole Polytechnique, Mustier is delightfully low-key. Highly respected for building Société Générale’s investment banking business, despite current local difficulties.
Andrea Orcel (44) – Merrill Lynch’s global head of origination. Orcel might not be perturbed by John Thain’s arrival at Merrill because Orcel is also a Goldman Sachs alumnus. Orcel is a dashing and erudite Italian who was educated at the University of Rome and Insead. He is fluent in four languages and is recognized as one of the best financial institutions specialists in the market. He has a phenomenal work ethos and is constantly travelling to see clients or do deals. Somehow finds time to water and snow ski.
Michael Philipp (54) – chairman, Credit Suisse, Middle East and Africa. Philipp is a very experienced banking executive whose career has spanned fixed income, equities and asset management. Has outstanding contacts in the Middle East, where he is known as "the bearded banker" and an irreverent sense of humour ("Markets will be markets", he told me during the August 2007 downturn). Philipp has an artistic side: he was a potter before he joined Goldman Sachs in the early 1980s.
Simon Robertson (66) – senior non-executive director of HSBC’s board. A former managing director of Goldman Sachs and former chairman of Dresdner Kleinwort Benson, Robertson, an old-style British corporate financier, now runs his own boutique, Simon Robertson Associates. Commentators are watching keenly to see how he will deal with the troublesome activist hedge fund manager Eric Knight for whom HSBC can do no right.
Hans-Joerg Rudloff (66) – chairman, Barclays Capital – an outstanding career banker. Legendary for his dominance of fixed-income markets in the 1980s and his stint as chief executive of CSFB in the early 1990s. At present very focused on eastern Europe client relations. In 2006, Rudloff was appointed as the only non-Russian board director of Rosneft. Also chairs BlueBay Asset Management, Marcuard Asset Management and the International Capital Market Association and serves as vice-chairman of Novartis. A ferocious workaholic but has a heart of gold.
"Mike Sherwood now whirls around the world in private aircraft spreading the Goldman gospel"
Hector Sants (52) – chief executive of the Financial Services Authority. With impeccable timing, Sants was appointed FSA chief executive in July 2007. He joined the FSA in May 2004 from CSFB where he was chief executive officer of Europe, Middle East and Africa. Some might argue that his reputation has been sullied by the Northern Rock fiasco but a mole insists: "Sants is a principled man who inherited a difficult situation."
Michael Spencer (52) – founder and CEO, Icap. Spencer founded Icap, the world’s largest inter-dealer broker, in 1986. Icap has a market capitalization of nearly £4 billion. Incredibly well connected, Spencer has a sense of humour and is said to be very charming. The son of a civil servant, he grew up in Africa and read physics at Oxford before joining a stockbroker. Is now the treasurer of the Conservative Party.
Michael Sherwood (42) – co-chief executive of Goldman Sachs International. Sherwood has spent most of his career at Goldman and rose through the fixed-income ranks to be co-head of the powerful FICC division. An important deal-maker, he whirls around the world in private aircraft spreading the Goldman gospel.
It’s a reflection of the sexism of the City that only one woman, Clara Furse, features on our list. However those in the know, know that none of the men listed could function without their trusted personal assistant. Indeed many of our power-brokers have multiple assistants to keep the show firmly on the road. The Abigail list of the five top personal assistants in London who can make or break you follows next month.