Is boring the new sexy? A long time ago, or so it seems, opaque was opalescent. Do you remember how in early 2007, we marvelled at the alphabet soup of products banks were cooking up? As outsiders, we might have wrinkled our nose at terms like CDOs, CLOs, SIVs, conduits and warehouses, but we knew bankers were much cleverer than the rest of us (they were paid so much more after all), so these creations had to be good things. To mere mortals, complex banking was creative, canny and above all glamorous, while the shadowy world of hedge funds and private equity was glamour squared.
Today, mired in recession, with the US unemployment rate hovering at 8%, the US stock market down 50% from its October 2007 peak, and write-downs in the global financial sector estimated at a trillion dollars, we now realise that CDO was either short for Can detonate ominously or an anagram for Cart of dung.
A more frugal future looms, one where simple is the new sane. And it was in this context that I went to meet António Horta Osório. António is the Portuguese chief executive of Abbey National, now wholly owned by the Spanish financial group Santander. Abbey is having a good war, doing what you are meant to do in lean times: purchase assets cheaply. Last year, Abbey acquired the branch network of troubled mortgage lender Bradford & Bingley as well as the whole of another UK bank, Alliance & Leicester. In 2008, on a net basis, Abbey wrote one in three mortgages in the United Kingdom. Profit before tax increased by 20% in 2008 to £996 million and Abbey doubled retail net deposits to £5.6 billion. In a world where wholesale funding is hard to obtain, sticky retail deposits are the caviar of a bankers diet.
Abbey is doing something simple: it is borrowing money from ordinary people, lending it to ordinary people and doing so prudently. Customer deposit growth increased 16% year-on-year, while customer asset growth increased by a more modest 10%. The loan-to-value ratio of Abbeys £110 billion mortgage portfolio is a reasonable 50%. Hang on a minute, isnt that what old fashioned banking used to be about boring things like prudence, limiting risk and focusing on core competences? When did we forget the basics of banking?
|A mole whispers: Stephen Hester grew up |
in the tough-knocks school of investment
banking. He doesnt do fluffy. But is he the
right person to turn round RBS? Absolutely
I hear mixed things about Mr Hester. Competent but arrogant, a mole mouths. Another source demurs: Hester grew up in the tough-knocks school of investment banking. He doesnt do fluffy. But is he the right person to turn round RBS? Absolutely.
The upside for Mr Hester at RBS is not clear to me. Why would anyone want to become a civil servant (now the UK government has a majority stake in RBS), clean up after Fred the Shred, endure rigorous public scrutiny and be paid not very much money for doing all of this? Time will tell if RBS springs agilely from the muddy swamp it finds itself in or sinks deeper into the murky muck.
Stephen Hester spent the early years of his career at CSFB, Credit Suisses investment bank. It is common to talk about the tentacles and power of the Goldman Sachs and McKinsey alumnae network. But perhaps we should talk more about the Credit Suisse diaspora. I was prompted to think about this by the appointment in late February of Credit Suisses former chief executive Oswald Grubel to head UBS. In fact, the financial terrain is littered with refugees from Credit Suisse who are now in positions of power. There are: Bob Diamond and Hans-Joerg Rudloff at Barclays, Hector Sants at the Financial Services Authority, Alan Howard running top hedge fund Brevan Howard, John Mack and Walid Chammah at Morgan Stanley, Jo Ackermann at Deutsche, David Reid-Scott at Hawkpoint, Michel de Carvalho at Citi, Carlo Calabria at Merrill Lynch, Larry Fink at BlackRock, Bruce Wasserstein at Lazard, Joe Perella at Perella Weinberg and Tony James at Blackstone. And I have a feeling thats only the tip of the iceberg. So a word of warning to all you Credit Suisse minions: be very nice to your colleagues because you never know where they might turn up next!
I return to my theme of boring being the new interesting. Right on cue, I received an invitation to meet Karen Peetz. Karen is head of one of Bank of New York Mellons three global divisions financial markets and treasury services and is responsible for approximately one-third of the banks revenue.
I have to admit that in the old days my eyes glazed over when someone mentioned the Bank of New York. I vaguely associated it with back office functions and custody services. But in this new sackcloth and ashes era, back to basics is good why else are we told to buy utility and consumer staple stocks in a bear market? I determined to look more closely at BONY M.
The bank has $20.2 trillion in assets under custody and administration and processes $1.8 trillion in global payments. The bank clears over 50% of all US government securities. Last year, it had a return on tangible common equity of 21%, net income of $1.4 billion and a tier 1 capital ratio of 13.3%. The current market capitalisation is around $28 billion (compared to Citis market cap of $14 billion). Last year, the bank wrote down $1.6 billion on its investment securities portfolio, which I find disappointing, but that level of write-downs is meagre compared with other financial firms.Karen is one of only two women on the firms executive committee and strikes you as straightforward, highly competent and very nice. She is responsible for the firms relationship with the Federal Reserve, and the bank has been working with the Fed to structure the Tarp and Talf programs. In finance, the top layer of senior women has been decimated: Zoe Cruz of Morgan Stanley, Sallie Krawcheck of Citi, Erin Callan of Lehman Brothers (and briefly Credit Suisse) as well as Rosemary Berkery of Merrill Lynch are no longer at their desks. I am therefore delighted to have discovered Karen. I will be watching her career trajectory with interest.
In todays hostile environment, no amount of money could induce me to work as a CFO at a US financial institution.
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