Abigail Hofman: Abigail and the Confessional
"Why did I tell you that? Please, please forget that I mentioned it," a chief wailed.
Why has Fred the Shred not been shredded? Sir Fred Goodwin, chief executive of Royal Bank of Scotland, still has a job despite several misjudgements. Other bank chief executives have had the grace to exit rapidly so why is FG ('Frankly, get on with it') still clinging to power by his toenails? Will it take an earth-mover to remove him?
The facts are well rehearsed. Fred, who gained the "shred"moniker because of his cost-cutting prowess, bid for anaemic ABN Amro at the absolute peak of the cycle for financial assets. At the time, a respected investment bank chief said to me: "Is there value in that acquisition, Abigail? Banking is all about people and do we know anyone outstanding who's still working at ABN?"
Fred did not act alone. He was part of an audacious triumvirate that included the European banks Fortis and Banco Santander. However, I always had the impression that for Fred this deal was personal. Because, of course, the rival bidder was another UK bank, Barclays. Barclays and RBS were ferocious competitors, especially in investment banking, where they both have the same fixed-income-focused model.
The consortium's bid for ABN Amro was declared unconditional in October 2007. Since then, RBS's shares have declined by some 50% whereas the S&P Europe 350 Banks Index is down only 35%. However, what makes Goodwin's gobbling up of ABN more invidious is that he proffered mostly cash rather than stock: ABN shareholders are singing while RBS's shareholders are sniffing smelling salts.
Sir Fred should note that Fortis's chief executive, Jean-Paul Votron, did the decent thing and resigned in July 2008 after Fortis was forced to raise more capital. RBS also raised more capital this year. In fact, they undertook the largest ever rights issue, of £12 billion ($21.3 billion) but Fred the gladiator lingers on.
In April, when announcing the rights issue, RBS's chairman, Sir Tom McKillop, insisted: "We have got to focus on looking forward from here. There is no single individual responsible for these events. To look for sacrificial lambs just misses the whole point."McKillop is missing the whole point. Highly paid chief executives have to be accountable for their actions. Would Sir Tom please explain to me why if no single individuals are responsible for the huge losses financial institutions have suffered in the past year, numerous bank chief executives and chairmen have relinquished their magnificent corner offices? It is good to know that the RBS board believes that it can rewrite the rules of engagement for banking conduct. However if I were a shareholder, I would be incandescent with rage. In August 2008, RBS announced a first half pre-tax loss of £700 million - its largest loss ever - following additional write-downs of £6 billion. Total RBS write-downs to date are some £7.5 billion.
I'm also not convinced that RBS's emphasis on all things tartan is beneficial to shareholders. Edinburgh is not widely regarded as a world-class financial centre. It thus seems odd that when the previous chairman, Sir George Mathewson, a career banker, retired in April 2006, the board recruited McKillop, another Scot, as non-executive chairman. However, Sir Tom's background is the pharmaceuticals industry: he was previously chief executive of AstraZeneca. He is also a non-executive director of BP plc which fellow RBS board member, Peter Sutherland, chairs. Isn't this coincidence too cosy? Boards are meant to be about diversity and discussion in order to protect the interests of shareholders, not conviviality and co-dependence.
A mole whispers that Sir Fred does not suffer fools gladly and sometimes the universe of fools equates to those who disagree with him. How strong is the leader who will not listen to an opposing point of view? And Sir Fred could do with listening a bit more. Having purchased ABN at top dollar just as the world was unravelling, Sir Fred has spent the summer months jettisoning non-core businesses such as Tesco Personal Finance, Angel Trains and lacklustre leverage finance loans. But one disposal project appears to have been derailed: the sale of RBS's insurance business, which is worth more than £5 billion. In May 2008, it was rumoured that Warren Buffett was interested in this asset but he baulked at participating in an auction.
Nevertheless, Fred decided to embark on an auction for the insurance business which went so well that, by August, there was apparently only one bidder left in the game.
Fred's floundering is compounded when one compares his recent reversal of fortune with the solid business performance of his consortium partner, Emilio Botín, chairman of Banco Santander. Spritely septuagenarian Emilio sold the Italian bank Antonveneta (which Santander acquired from ABN) within weeks of the acquisition. The sale to Banca Monte dei Paschi di Siena achieved a profit of billions of dollars for the Spanish bank and must count as one of the deals of the decade. Savvy Santander also made off with the Brazilian assets of ABN, which many considered the truffle in the Dutch omelette. Banco Santander was named Euromoney's best global bank of 2008.
Fred limps on: bloodied but not bowed and still with access to the RBS private jet. What will it take for the supine board to sack him? A source snarled: "It's a disgrace - Goodwin poncing around on his private jet. If his travel schedule is so rigorous, do what normal mortals do and fly easyJet. They go to lots of off-piste destinations."Oh and surprise, surprise, there's no obvious internal successor in the sprawling Scottish empire, which spans three continents and employs approximately 170,000 people. However, there are faint wisps of smoke to indicate that the board might be listening to discontented shareholders. At the end of August, it recruited three new members with substantial financial services' experience (including 47-year-old former Credit Suisse banker Stephen Hester). Perhaps finally, Sir Fred's tenure is looking more tenuous. What do you think?
Meanwhile over at the Canary Wharf headquarters of RBS's rival, Barclays, Schadenfreude would be misplaced. The share price is wilting, domestic operations will be tarnished by a UK recession and the stellar growth of investment bank Barclays Capital is slowing. Wicked whispers circulate that Barclays has not been sufficiently conservative on marking down assets. For example, a group of banks including Credit Suisse and Goldman Sachs sold Endemol leveraged loans for approximately 70 cents on the dollar in June 2008. Barclays, which participated in the original leveraged buyout, did not sell its portion and has not written down this position because it is held on the banking book and is still performing. A mole murmurs: "If Barclays has to raise more capital after the recent £4.5 billion replenishment, its credibility will crumble. I'm not sure that senior management could tap-dance their way out of that one."
I do wonder what Barclays' chairman, Marcus Agius, makes of it all. Cambridge educated, Agius is married to a Rothschild and is heavily involved with the nation's horticultural heritage (he is a trustee of the Royal Botanic Gardens, Kew). Glossy Marcus, who joined Barclays in early 2007, always reminds me of that wonderful line: "Too cool for school." A former investment banker and chairman of Lazards, London, Agius must be disconcerted by all the capital that Barclays ploughed in to opaque debt instruments. After all, a corporate financier's calling card is "Advise, advise, advise and leave risky lending to others."Agius's annus horribilis has been exacerbated by an unfortunate episode with a wily imposter who managed to steal the chairman's identity and defraud the patrician one of £10,000 via a Barclays call centre.
Sometimes, a contrarian call is the best bet. Barclays' Capital's senior management are looking to expand in the US as investment banks there, hobbled by the credit crunch, revert to the foetal position. Jerry del Missier, president of Barclays Capital, is based in New York and Bob Diamond, who is responsible for investment banking at board level, is also spending a lot of time in Manhattan. Who then is minding the fort and providing leadership for the investment banking troops back in Europe, I wonder? Surely it couldn't be boy wonder John Winter, European head of investment banking? Winter, who, by some anomaly that escapes me, reports directly to Diamond and not, as a rational organogram would require, to Jerry del Missier, is regarded as an admirable administrator rather than a prolific rainmaker. Maybe Diamond should think about plugging the gaps in Europe before battling the Americans on the banks of the Hudson River.
The spectre of UBS, which expanded aggressively in the US, should serve as a horrible warning. Indeed, more muddled thinking emanates from the sedate streets of the sleepy Swiss financial capital, Zurich, where all respectable citizens are fast asleep by 10 o'clock at night (a habit of which I heartily approve). UBS has jettisoned its integration mantra and is flirting with desegregation. Plans were unveiled in August to establish its three main businesses (investment banking, private banking and asset management) as autonomous divisions which will not share infrastructure, people or capital.
UBS might never recover from the events of the past year: more than $40 billion of write-downs at the investment bank, significant private and institutional client outflows, and numerous investigations by the US authorities. There's only one word for this series of disasters: heinous.
So does this reorganization help the Swiss bank? Probably not. Duplicating infrastructure will be costly, incentives to cross-sell products will dwindle and a "them and us"mentality will emerge. I wonder if this dismemberment is meant to pacify angry shareholders such as Luqman Arnold. UBS's chairman, Peter Kurer, is trying to slither towards a situation where he can sell off the troublesome investment bank. However, I don't see any buyers on the horizon. It is bizarre that former fixed-income chief Andre Esteves (who lasted less than a year in this role) has been allowed to take several UBS traders with him to his new hedge fund. "If it were my decision,"a rival chief said brusquely, "I'd close the investment bank down right now."You know sometimes the tough decisions are the right decisions. What do you think?
And talking of correct decisions, it's not easy being a bank chief executive in this era of financial train wrecks. Whatever you do is likely to be criticized by paranoid boards, angry shareholders and the braying media hordes. A sense of humour is essential to put these tribulations into perspective. On a recent trip to New York, I was drinking in a bar with a friend, Fred, when Stan O'Neal, the former chief executive of Merrill Lynch, walked in. Fred and Mr O'Neal know each other well, so it was natural that Fred should introduce me: "Stan, do you remember Abigail? She wrote for Euromoney."O' Neal looked at me and enquired politely: "Do you still work for Euromoney?""Yes,"I stuttered, taken aback by his approachable manner. Stan smiled ruefully: "Well, you may have noticed that I am no longer working at Merrill Lynch."
"Ah, the human side of Stan O' Neal,"a source cooed. And, of course, chief executives are human beings too once you extricate them from the cashmere cosseting that goes with the role and the inevitable, numerous gatekeepers. Through my column, I have been fortunate enough to meet some of the most senior men in finance. We all know that there is a lack of women at the top in banking, although I recently encountered Ana Patricia Botín, chair of Banco Banesto, who is as charming and clever as she is reputed to be. Eva Castillo, head of EMEA private clients at Merrill Lynch, is another exceptional senior woman who has the potential to go much higher.
But it's lonely at the top and increasingly senior financiers are confiding their innermost secrets to me. "Why did I tell you that? Please, please forget that I mentioned it,"a chief wailed. I'm not sure why I am experiencing this "Abigail and the Confessional"phenomenon. Perhaps it's because senior financiers know that, as an ex-banker, I understand the environment in which they operate. Perhaps it's because I am rigorous about never revealing my sources of information. "People like you and they trust you,"one chairman said.
Occasionally however, I feel that I should place a sympathetic hand on the arm of the garrulous chief executive in question and murmur: "Do remember that I am the vixen columnist of the markets."Another alternative would be to adapt a high priestess mode and intone: "Say three Hail Marys, my son, and pray that the short sellers don't get you."
It's paradoxical but chief executives rarely have delicious stories to reveal. They revel in overview and strategy, don't do dirt and are obsessed by conflicts of interest. Chiefs are always very bright - it's easy to see why they got to the top - but they can be overly controlling. One senior banker started his meeting with me by shouting at his secretary that his next meeting (which was a client lunch) couldn't take place in the room where we were sitting because it was too claustrophobic for 10 people. Later, I pondered whether this diatribe implied impressive attention to detail or meaningless micro-management? There might be some truth in the warning of a friend: "The problem with a control freak is when it loses control, all you're left with is a freak."
By the way, have you noticed that frugality is the new frivolity? David Rosenberg, Merrill Lynch's chief North American economist, picked this up when he wrote in August: "The second-quarter GDP data that came out last week were revealing in terms of the tectonic shifts that are now occurring in the 72% chunk of the economy called the US consumer. We are detecting early signs that a new pattern of spending behaviour is taking hold in the aftermath of the housing, credit and oil shocks; it is called frugality. The trend towards essentials and away from discretionary. Eating in is in while eating out is out. More reading, less recreation. Flying abroad has been grounded, but there's no fuss in taking the bus."Like all great trend spotters, Rosenberg has encapsulated the "one year in to the credit crunch"zeitgeist. When I had lunch with a journalist, Jane, last week, she complimented me on my necklace. "Oh thank you,"I said. "I bought it at Maxamara in Boston."Jane winced. "No, no Abigail,"she exclaimed. "You have to say that you bought it for nothing in a back-street market. Economize is the new word for enterprise."
This is especially true among the previously smug set of international bankers. I'm amazed at how few bankers sold their bank stock at the peak last year or hedged any bank shares in their portfolio. The result is the rise of the nouveau pauvre financier. So I'm wondering if this sense of sensibility will spoil the party scene at the annual IMF-World Bank meetings in Washington in mid-October. When prompted, a senior banker grumbled: "It's not as fun as it was. And I don't think that's me becoming older. Obviously from a business perspective, the meetings are useful but this year there will be such scrutiny on who's going and why they're going, I imagine we'll all be exhausted before we get there."
Finally, in this era when banks are blamed for everything, it's tough working in a bank corporate communications department. You need a rhinoceros's hide to lurk inside and an elephant's trunk to swat all those aggressive journalists who are relishing your discomfort. So which head of media relations at a major financial institution was recently dubbed "A bitch on a broom",' by an impeccable source, for her overzealous loyalty to the bank's beleaguered management?
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