Abigail Hofman: Off with their heads
"Life is fragile," Jamie Forese, Citi’s head of markets, mused. We were sitting in his office at Citi’s New York investment banking headquarters. It was the eighth anniversary of the September 11 World Trade Center bombings. I thought of Jamie’s words when the 61-year-old legendary banker Bruce Wasserstein, chairman and chief executive of Lazard Ltd, died unexpectedly in mid-October. Wasserstein, like Larry Fink, the chief executive of BlackRock, was a Credit Suisse First Boston refugee who went on to found his own firm, become a billionaire and leave an indelible mark on the financial firmament.
In the 21st century, 60 is the new 40. To die at 61 is to die young. After all, omnipotent old-age pensioners such as Warren Buffett, Felix Rohatyn and Paul Volcker still prance around the world stage. Dick Fuld, the former Lehman Brothers chief executive, is rumoured to be setting up his own advisory firm at the tender age of 63. It is sometimes said that no one on his deathbed wishes he had spent more time in the office. Many bankers confuse working with living. They should remember Wasserstein’s untimely death. I acknowledge that there is a coterie of committed bankers who passionately love what they do. Although I never met him, I imagine Wasserstein was in that mould. I was intrigued to see that despite his devotion to doing deals, the corporate matchmaker managed to make four matches of his own. In 2009, Wasserstein remarried for the fourth time. Nicknamed "Bid ’em up Bruce", he may have been a bruiser in business but he was clearly a romantic at heart.
This autumn, I was privileged to spend several hours with some of Citi’s top bankers: Jamie Forese, Ray McGuire and Paul Simpson. I was interested to find out how the firm was faring one year after it stumbled into the taxpayers’ arms. Today, the US government owns 34% of the bank. Citi’s institutional clients group is run by John Havens. Heavyweight Havens joined the bank in 2007 with the current chief executive, Vikram Pandit, when Citi purchased their hedge fund, Old Lane, at a ridiculously high valuation. Old Lane was closed a year later. Citi’s institutional clients group includes the global transaction services, global banking and global markets areas as well as the private bank and alternative investment group.
Wall Street is an intricate labyrinth: the kings and princes all know each other and often worked together. Ray McGuire, Citi’s head of global banking, was a protégé of Wasserstein. McGuire started his career in the mergers and acquisitions group of First Boston and then followed Wasserstein and Joe Perella when they left to start Wasserstein, Perella & Co. McGuire has an outstanding résumé. He was born on the wrong side of the tracks but has risen far in the over-privileged world of finance. "I am a statistical aberration," he said with a wry grin. As you would imagine, McGuire was upbeat on the Citi story, citing the breadth and depth of Citi’s global presence. "There is no other franchise which can talk to you about 109 countries," he insisted. This year, Citi has advised Kraft on its possible acquisition of Cadbury, Volkswagen on its merger with Porsche, and Affiliated Computer Services on its sale to Xerox. McGuire, who joined Citi from Morgan Stanley in 2005, was appointed to his present role this summer. Indeed, some whisper that his elevation prompted the popular head of European banking, Tom King, to resign. King has now joined Barclays Capital. Undeterred, McGuire presses on: he is integrating the corporate and investment banking relationship management functions and streamlining coverage into eight main industry groups. This year to date, according to Dealogic, Citi is ranked number four in the global M&A league table. The challenge for McGuire is that, while Citi has stabilized in the past few months, it has not regained its previous blue-chip status. The strong hand of the state is not helpful when it comes to recruitment and retention of bankers. It might also affect the way clients perceive the firm. According to Bloomberg, JPMorgan’s advisory revenues in the first nine months of 2009 were $1.26 billion whereas Citi’s comparable revenues came in at $543 million. A Citi spokesperson pointed out that Citi does not include liability management assignments in its advisory fee total whereas certain competitors do.
Francesco Vanni d’Archirafi, head of the global transaction services (GTS) division, was not in New York when I visited. So I met with his direct report, Paul Simpson, who is Citi’s global head of treasury and trade solutions. Paul assured me that the turmoil of the past year had not affected the growth of his business. He talked about the crisis being a once in a lifetime opportunity for his division. "I was tired and overworked but I learnt a lot and spent a lot of time with clients," he said. As the world trembled, clients looked for a competent partner that could ensure that the nuts and bolts of their business continued to hold. Functions such as corporate credit cards, cash management, payments, receivables and trade finance might not have the glamour of roller-coaster investment banking but they are essential to any big organization. The GTS business is driven by and reliant on technology. I was intrigued to learn that the technology budget across the division was $1 billion for 2009. In fact, Vanni d’Archirafi often describes his area as "a technology company with a banking licence attached". In the third quarter of 2009, GTS had revenues of $2.5 billion and income of $939 million. "It’s a fabulous business for the firm," a mole murmured. "Frankly, there’s no true global competitor in this area." Citi was voted the best global cash management bank in Euromoney’s 2009 annual poll.
The third musketeer of the Citi triumvirate is Jamie Forese, the New York-based head of the global markets business. Paco Ybarra, co-head of the markets division, is based in London. Jamie is one of finance’s great survivors or "the last of the Mohicans" as a source put it. He started his career at Salomon Brothers 24 years ago and has a wealth of investment banking experience spanning fixed income, derivatives and equity. In fact, he ran the equities business for Citi until he was promoted to run the markets division in October 2007. Forese is popular inside the firm and respected outside it. A source said: "I would describe him as approachable and real as opposed to many senior bankers who are slick and insincere." You will get a sense of how comfortable I felt with Mr Forese in that the first question I asked him was: "Why are you still here?" Forese could easily go to another organization, run a hedge fund, or retire and sail around the world. He talked about the loyalty he felt to his colleagues who had worked so hard over the past 18 months. He also said he thought the worst was, in many respects, behind Citi: the bitter medicine had been imbibed, capital ratios were no longer being questioned, the core franchise was intact and customer relationships were still strong. Forese felt that the bank could survive severe stresses in future. "All doubts about Citi’s role as a lender in global banking have been eliminated," he told me.
In a way, the sons are paying for the sins of the fathers. Sandy Weill, Chuck Prince, Tom Maheras and Michael Klein created a problem that is too big to solve quickly. Citi’s new management has the invidious task of trying to hold everything together while the crotchety shareholder quibbles from the sideline. The latest utterances from Kenneth Feinberg, the US pay tsar, are a good example. Frugal Feinberg wants to reduce the compensation of the top 25 executives at seven companies (including Citi) where the taxpayer still has a large interest. The Obama administration is trying to placate public outrage. But popular is not always correct. If the authorities want the best for the taxpayer, they need to rein in the rottweilers and be more pragmatic.
Of course there were excesses. It is rumoured that a former chief of a big US investment bank was attached in equal measure to his laser pen and the corporate jet. On one occasion, chief found himself parted from his precious pen prior to a presentation at an important offsite. Chief immediately sent a private jet back to corporate headquarters to fetch the gadget. I should add that laser pens can be purchased for under $15 from online retailer Amazon.
I move on to another ward of the state, Bank of America. Eva Castillo, head of Bank of America Merrill Lynch’s private client group, EMEA, has resigned and will leave at the end of 2009. Eva, who is Spanish, has a warmth that is often missing in the gene set of senior female financiers. She is also extremely professional and has achieved a huge amount in 12 years at Merrill Lynch.
Sources tell me that she is not planning to join another financial institution immediately but in due course will focus on new challenges. She worked hard on the integration with Bank of America and always spoke positively about the future of the firm.
Nevertheless, in the last year she has had three different bosses (Bob McCann, Dan Sontag, Sallie Krawcheck) which, as far as I am concerned, is too much of a good thing. She remains a main board director of Spanish company Telefónica. I am sure she will have many suitors and I look forward to hearing what she will do next.
The story that obsessed European bankers this autumn was the wounding of wunderkind Bill Winters. Winters was co-head of JPMorgan’s investment bank until he was abruptly informed that he was surplus to requirements. A senior banker at another firm told me: "Winters was JPMorgan in Europe. Full stop." No one (apart from Morgan’s chief executive, Jamie Dimon) understands why Winters is no longer at his desk and I think that probably goes for Winters as well. There are rumours that Dimon did not break the news himself and that the bearer of bad tidings was Bill’s co-chief executive, Steve Black. If that rumour is true, Dimon needs to grow up and act like a man. I wrote about Jamie Dimon in my July column and ruminated that too much power might be concentrated in his hands given his role as chairman, chief executive and president of the company. Is Dimon in danger of catching "red carpet fever" and falling prey to his own PR machine? Hubris is always followed by nemesis. One source speaks about Dimon suffering from "tall poppy syndrome" and worrying that Winters was too much of a threat. Another talks about Dimon subconsciously replaying his own history with mentor Sandy Weill, former chief executive of Citigroup. Weill brutally dismissed Dimon, supposedly his heir apparent, in 1998. "Dimon is Sandy and Winters is Dimon in this replay," Source said. Source also added that perhaps Dimon never felt comfortable with Winters, who was a JPMorgan employee and not one of Dimon’s original Citigroup team like Steve Black. In the reorganization, Black becomes executive chairman of the investment bank. Source continued: "The bottom line is Jamie likes to socialize with his inner circle and Winters was never into that. After all Jamie and Sandy virtually lived out of each others’ suitcases when they were doing all those acquisitions and building the Travelers empire."
"Can JPMorgan afford to lose Winters?" I asked my source. "The investment bank had a fabulous war but other parts of the firm, such as card services and consumer lending, are weak." Source sighed: "My dear Abigail, you have to put yourself in Jamie’s shoes. Jamie thinks if he were in charge of the investment bank the results would have been even better. And maybe he’s correct!" For the moment, Winters is keeping his counsel and it is not clear where he will resurface. But Dimon’s decision to replace Winters is at best odd and at worst quixotic. Jes Staley, previously head of the asset management division, is named as the new chief executive of the investment bank. Staley, who joined JPMorgan in 1979, has a broad banking background including 20 years in the investment bank. He did a creditable job in asset management, increasing sequential net income by 22% to $430 million in the third quarter. However, the investment bank made $1.9 billion in the third quarter, more than four times the profit derived from asset management.
I wonder if Dimon’s JPMorgan is overly US-centric? The firm is proud to be global: "JPMorgan is a leader in financial services... with one of the most comprehensive global product platforms available," the website warbles. It is true that the bank has operations in more than 60 countries and a substantial part of its revenues come from outside the US. But all the members of the main board are US citizens and live in the US. Bill Winters was based in Europe. Staley is staying in New York, for the moment. Maybe he should move to London or Hong Kong? Otherwise, despite JPMorgan’s purported devotion to a "global product platform", it risks being seen as a Bank of America type organization where all power resides in the US.
I have written in the past that Dimon is the last surviving imperial chief executive on Wall Street. Others such as John Mack and Ken Lewis have recently been defenestrated. I’m not sure that the edict "Off with their heads" works any more. Only time will tell how JPMorgan will fare. But Staley steps into big shoes. Let’s hope the investment bank has a fabulous fourth quarter. Otherwise, some might start to question Dimon’s judgement.
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