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Opinion

Abigail Hofman: "We’re here to save the world and we don’t need any questions"

The world is starting to resemble a spinning top: one week the markets soar, the next they sink. Even mighty masters of the universe are confused: hedge funds and banks had a dire month in March.

And could there be a mightier Master than Hank Paulson, the present US Treasury secretary and former Goldman Sachs chief executive. Cast your mind back to the balmy days of the summer of 2006 when his appointment was announced and he strode off the small but highly lucrative Goldman Sachs stage to play in the global theatre of international finance.

At the time, I cautioned that tree-hugging Hank might find his new job challenging. How little I knew. In fact, I can envisage only one job worse than being US Treasury secretary in this period – and that is being chief executive of an investment bank. As a banking chief, you now have to fire lots of people who will hate you for life; shareholders hate you because you keep on announcing write-downs on instruments they don’t understand (and certainly don’t understand why you owned them in the first place); and, in the end, you probably have to resign and your family will hate you because you skulk around the house all day moaning about your misfortune to have been a chief executive during the worst banking crisis since the Great Depression.

One man, of course, has distinguished himself in these dark days: Jamie Dimon, chairman and chief executive of JPMorgan Chase. But might the stress of snaffling Bear Stearns at a bargain basement price have made the great man a little irritable? A source reports a story that is wafting around Wall Street. The night before the Bear deal was announced Hank Paulson corralled the major banking chiefs on a call to take them through the transaction. Paulson signalled that this was a high-level overview so he wasn’t encouraging any troublesome detailed questions. When Hank paused for breath, a participant intervened to enquire how counterparty exposure would be handled. Suddenly, Jamie Dimon yelled: “Who is this?”

“Its Vikram”, came the reply.

“Vikram – who is Vikram?” asked Dimon.

Vikram Pandit,” replied Citi’s chief executive.

“Well, Vikram Pandit shut up, this deal has been done.” Apparently, Dick Fuld, Lehman Brothers’ chief executive, then tried to persuade the bickering bankers to comport themselves in a more mature fashion. My source grumbled: “ Dimon’s attitude seemed to be: ‘We’re here to save the world and we don’t need any questions.”  Might it be that the credit crunch is not bringing out the cuddly side of banking chiefs?

No group hugs either on the Bahnhofstrasse, which is witnessing the unravelling of UBS. Switzerland’s biggest bank is committing death by a thousand cuts and this descent from hubris to hunted has taken less than a year. With write-downs so far totalling $37 billion, several capital replenishments and a vicious cull of senior management (including the former chairman, Marcel Ospel), UBS still looks vulnerable. Its new management is a motley collection of old nags from support function pastures pressed into active service (the new chairman, Peter Kurer, is the bank’s previous general counsel), to younger men with front-office experience such as Morgan Stanley refugee Jerker Johansson (the new chief executive of the investment bank) and 43-year-old Marcel Rohner, who was appointed last July as UBS’s chief executive. But how easy will it be for this new management team to meld, and stop the good ship UBS capsizing?

Moreover, it’s not clear that UBS’s pain is over: as of March 31 2008, the bank had more than $30 billion of US sub-prime exposure and there will inevitably be an impact on UBS's lucrative wealth management franchise. So what solution is the new management proffering? It seems to be a case of “muddle through and hope for the best”. Former president Luqman Arnold’s proposals for a break-up of the various businesses have been greeted with vague platitudes. I hear rumours that problem loans will be migrated to a ring-fenced company that could be run by fixed-income chief, Andre Esteves. Another mole reports that Esteves, the previous managing partner of Banco Pactual, which UBS purchased in late 2006, has had enough of the gnomes and wants to pack his bags and go home to Brazil (the girls are prettier and the weather is warmer). Who will run UBS’s slimmed-down fixed-income business, albeit that I expect the division’s appetite for risk to be anaemic? Suneel Kamlani, the investment bank’s present chief of staff, might be a potential internal candidate. But surely new blood is called for?

“Who can we turn to outside the firm to run our fixed-income division?” an insider asked me with a furrowed brow. After some pondering, I came up with an inspired answer: “Why not find out what happened to Jim Healy?” I said. Jim Healy was the former head of fixed income at Credit Suisse. Frequently described as “beloved”, Healy saw little point in hanging around when Brady Dougan brought in former Goldman Sachs banker Mike Ryan (see more below) last summer to be his boss. And talking of people who hang around, can it be true that Ramesh Singh, once UBS’s global head of securitized products, still has a job? “Oh yes,” my mole whispered, “Singh is now charged with getting us out of our difficult MBS positions.” Well, if that is what is meant by a fresh start, I suggest investors scurry for the exit.

However, not everyone who works at UBS is consumed by gloom and keeping a low profile. An interesting trail of e-mails crossed my desk and led to James Tulley, an executive director based in UBS’s Singapore office. James, affectionately known to friends as Tulley Tubby, was profiled in a recent edition of the Singapore Tatler discussing his wardrobe and sartorial preferences. Tulley is photographed sporting an enormous Cartier watch, a gorgeous grey silk tie, a dab of Creed cologne and a smirk. The dapper one, who regularly carries a designer briefcase from Paris, tells Tatler that he has 30 pairs of spectacles and 100 pairs of shoes, including a $4,000 Louis Vuitton red number suitable for both “formal and casual outings”. The mind boggles – and you thought we were in the midst of a global recession?

Credit Suisse staff may not be featuring in fashion magazines but the smaller Swiss bank has had a few distractions of its own. In late February, one week after reporting respectable fourth-quarter results and making soothing noises about its robust risk management, the bank irritated investors by announcing additional write-downs resulting from adverse market conditions as well as “mismarkings and pricing errors by a small number of traders”.

In my March column, I called for a reduction in the responsibilities of Mike Ryan, Credit Suisse’s global head of securities. At the time Ryan was in charge of equities and fixed income even though he was an equities specialist. In mid-April, Paul Calello, the charismatic head of Credit Suisse’s investment bank, announced a major reorganization. Gael de Boissard, Tony Ehinger, Steve Kantor and Jonathan McHardy were appointed co-heads of Global Securities reporting directly to Calello, and Ryan was erased from the management organization chart.

“You called that one right,” an insider said ruefully. Ryan, whom a source describes as “extremely bright, personable and possessing the highest ethical standards”, was recruited from Goldman Sachs in February 2007 by Credit Suisse’s current chief executive, Brady Dougan, when Dougan was running the investment bank. However because of gardening leave, Ryan did not start at Credit Suisse until August 2007. “Ryan was never going to fit in,” one source opined. I’m not sure that is correct but I am reminded of the words of the late, great financial journalist Ian Kerr: “Those Goldman guys don’t travel well.”

The real issue for me is why has Ryan left? The internal memo says: “Mike Ryan will be leaving Credit Suisse”, not that he resigned. Any senior banker who was departing would normally want it spelled out if he had resigned. Could Credit Suisse be holding Ryan accountable for the ballooning losses and fraud (which is what the mismarking turned out to be) in its fixed-income division? Who knows, but it would surely be difficult to pin poisonous positions that would have been in place before he crossed the Credit Suisse threshold onto Ryan.

Another possibility is that Credit Suisse tried to put the genie back in the bottle along the lines I suggested in my March column: confine Ryan to equities and appoint someone else to run fixed income. Ryan might not have welcomed that demotion and his lawyers would have been well positioned to argue that this compromise constituted constructive dismissal.

I strongly suspect that Ryan had a long-term employment contract with some form of multi-year guarantee. Remember, Ryan was hired at the absolute apogee of the boom. I imagine the two parties are striking a deal: Ryan goes quietly (rumours are rife that he will resurface at Merrill) and Credit Suisse pays him out under his contract.

I am not happy. If I am correct that Ryan will be paid to walk, the Ryan interregnum will have been an expensive mistake. Mole, however, was delighted. “As far as I’m concerned,” said Mole, “we now have a sensible structure and fewer layers of management, which can only be a good thing.” A Credit Suisse spokesperson declined to comment on Ryan’s departure and several calls to Ryan’s mobile phone were not returned.

It is not only Credit Suisse that faces personnel problems. Legendary hedge fund GLG has lost the battle to retain the services of its star manager, the laid-back Australian Greg Coffey. A mole whispers that Cofffey ran more than a quarter of the $24 billion assets under management and his main GLG Emerging Markets fund rose more than 50% last year. Suddenly a new phrase has entered the financial lexicon: “key man risk”. After all, wealthy investors like to look into the whites of the eyes of the man they give their money to and substitution is not allowed. “We’re not interested in the marketing guys,” a manager of a substantial family office told me. “If the principals don’t make time to see us, we pass.” As far as I’m concerned the GLG saga is becoming a dog’s breakfast: the shares which were listed on the New York Stock Exchange last November have now dropped by 30% and in mid-April, there was an embarrassing restatement of profits (due to an accounting technicality) as well as news that the firm was being investigated yet again by the French authorities for trading irregularities.

It might be the case that GLG is becoming a great place to be from but not a great place to work at. I hear that GLG’s former star trader, Philippe Jabre, is doing very well with his new hedge fund, Jabre Capital, based in Geneva. Jabre Capital opened for business last February and now has some $5 billion under management. A source says that performance this year to date has been creditable. Wouldn’t it be weird if in the next few years Jabre Capital ended up with more money under management than GLG? When GLG went public last June (via a reverse takeover), I said that I felt uneasy about the appearance of a hedge fund in the public arena. Noam Gottesman, GLG’s co-founder, might be starting to agree with me. How much easier his life would be now if all this upheaval was occurring behind the veil of privacy associated with a private company.

And talking of personnel issues, one of the first of the credit crunch casualties has resurfaced. The highly rated Osman Semerci, Merrill Lynch’s former head of fixed income, currencies and commodities, lost his job last October because of large write-downs in the CDO market. Despite virulent rumours that 40-year-old Semerci would reappear at Deutsche, the young Turk is joining London-based hedge fund group Duet Asset Management as chief executive. There are divergent views on Semerci: some say he is arrogant, others that he is inspirational. I found him charming and he dealt patiently with my interminable questions. Duet co-founder Alain Schibl told me: “With Osman on board, we believe this firm, which has performed very strongly in the last six years, can become a leading European alternative asset manager.” Semerci might find the transition from a big organization such as Merrill to a relative minnow such as Duet challenging, but he is enthusiastic about the opportunity to grow a business. Duet has $1.7 billion under management today, it will be interesting to see how asset-gathering develops over the next year.

Do you remember last year when Londoners were feeling very smug? There was a lot of posturing that London was overtaking New York as the financial centre of the world. I never believed it and shared my view with readers. The infrastructure of London is rotting and rotten and New York has adrenaline, ambition and abundance that no other city replicates. Once again I have been proved right. The UK authorities have been shown to be toothless tigers, while their American peers are ravenous Rottweilers. Compare the agonizing and elongated demise of the floundering English bank Northern Rock with the almost indecently hasty rescue of US investment bank Bear Stearns. The imposition of taxes on wealthy foreigners in the recent British Budget will adversely affect the status of London as a “business friendly” city. And you’ve seen for yourself the pandemonium at Heathrow’s Terminal 5, which was meant to be an answer to a maiden’s prayers as far as airport efficiency was concerned.

My spirits were lifted, however, when I bumped in to Boris Johnson, who is standing as the Conservative candidate for London’s Mayor. When I say “bumped into”, I am being economical with the truth. In fact, I accosted Johnson at a London restaurant where he was dining with three other men. Devoted readers will know that when it comes to obtaining stories for my column, I have no shame. Dishy, dishevelled Johnson could not have been more delightful when I expressed my support for his candidature, and his campaign manager Lynton Crosby will always have a place in my heart. “Are you old enough to vote, young lady?” he queried. Crosby is the Australian political strategist who ensured three general election victories for former Australian prime minister John Howard. The London mayoral election on May 1 will be a closely contested fight. I am keeping my fingers and toes crossed that Boris wins and I look forward to interviewing him after his victory.

And finally, veteran dealmaker David Mayhew, chairman of JPMorgan Cazenove, is back in the spotlight. In February, Mayhew managed to mislay his chief executive and long-time Caz colleague Robert Pickering, who resigned abruptly, apparently to go fishing and spend more time with his winsome, young second wife. And since then there have been Delphic utterances that a search for a new chief executive is under way. Rumours abound that external candidates such as Simon Robey of Morgan Stanley and Bob Wigley are preferred to current JPMorgan employees.

The problem for an outside candidate is that it will take ages to get their arms around the complicated Cazenove culture and the internecine workings of its joint venture with JPMorgan. And within a few years, JPMorgan will almost certainly absorb Cazenove, so the semblance of independence will disappear and the scope of the job will shrivel. Where does that leave an outsider? Essentially they are taking on an 18-month job and in the meantime have to deal with all the gruesome Caz/JPMorgan politics.

Mayhew should look internally where there are various talented potential chiefs such as Ed Byers, Alan Carruthers and Ian Hannam. I am a fan of Hannam, a superb deal-maker, who is chairman of JPMorgan Chase equity capital markets and has worked for the Morgan group for more than 15 years. Hannam’s clients think he walks on water.

A highly respected chairman of another bank told me: “Hannam can be combative but one thing you know – if he gives you his word, he will deliver.” Hannam is of the old school where, “my word is my bond” counts for something. Another old-fashioned value is loyalty. Mayhew should be loyal to his JPMorgan Cazenove colleagues and appoint an internal candidate to succeed Pickering.


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