Abigail Hofman: "Meltdown survivor and proud of it"


Abigail Hofman
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Have we learnt anything from the unsettling events of the past nine months? I have learnt that bankers have short memories and exceptionally short recall regarding painful reminiscences. Maybe it’s part of the human condition. It certainly seems to be part of a banker’s DNA.

Abigail's biography

In the past month I have met a number of senior bankers to discuss their businesses. You can forget about green shoots, their attitude can be characterized as burgeoning verdant forests. Bankers have always suffered from the curse of group-think and this has not changed.

In June, I wrote about under-employed senior financiers: those who were victims of the industry’s savage job cuts. A chief executive penned me a short note: "Abigail," he shuddered, "I hope never to be one of the under-employed whom you mention."

I discern a trend here. Those who resigned or were sacked during the crisis months may never find their way back to the mainstream and probably find life in the slow lane frustrating. However, those who surfed the wave of disaster adroitly and remain at their desks are reinvigorated. They might as well wear a badge stating: "Meltdown survivor and proud of it." I sense a hint of arrogance among the senior survivors. "So few of us made it through to the other side," one chief confided. "And in the last few weeks, I’ve been called about three senior jobs. There’s a much more limited pool to choose from now."

Arrogance is aggravated because the big banks are once again making substantial amounts of money. After a near-death experience last autumn, senior staffers are experiencing a rush of blood to the head. Why, if things continue like this, even those bankers who have not managed to wangle a guaranteed bonus could be in line for substantial year-end payments. Oh and yes, multi-year guaranteed bonuses are back. After all, rising fixed costs are a small price to pay for attracting the best talent, or so some temporarily deranged chief executives think. A word of advice from the Abigail with attitude column – be very cautious. Humility is a virtue few of us are blessed with. But just when you think the shark has swum away, he returns to savage you.

My wariness was reinforced in mid-June when I watched Bob Diamond and Larry Fink interviewed on Bloomberg television about the sale of Barclay’s asset management business, Barclays Global Investors. Diamond and Fink, exuding positive sound bites, resembled two Cheshire cats who had dined well on double cream
My wariness was reinforced in mid-June when I watched Barclays’ president, Bob Diamond, and BlackRock’s chief executive, Larry Fink, interviewed on television about the sale of Barclay’s asset management business, Barclays Global Investors. As I predicted in last month’s column, BlackRock won the battle for BGI, paying approximately $13.5 billion or 11.9 times BGI’s 2008 published ebitda. Diamond and Fink, exuding positive sound bites, resembled Cheshire cats who had dined well on double cream. Of course, the transaction reinforces Barclays’ capital ratios and BlackRock becomes the largest global asset manager (with a pro-forma $2.7 trillion of assets under management), but the road ahead might be bumpy. The sale of BGI leaves Barclays more exposed to the weak UK economy and BlackRock may lose senior BGI managers who have stock options which vest on a sale of the business. I noted that the shares of both institutions fell, along with other financial shares, in the week following the announcement of the deal.

David Rosenberg, the chief economist of Gluskin Sheff, quoted Bob Farrell’s market rule number nine in a recent research piece. This rule states: "When all the experts and forecasts agree, something else is going to happen." Recently, commentators have rushed to proclaim that a new elite is emerging in investment banking. These so-called winners have been prosaically dubbed the Big Six and consist of two tiers. The top tier is Credit Suisse, Goldman Sachs and JPMorgan. Close behind come Morgan Stanley, Deutsche and Barclays. I don’t believe in the wisdom of crowds and I wonder if it might not be a little early to proclaim the new panoramic landscape. If one looks at the Dealogic 2009 league tables, year-to-date (June 19 2009), Bank of America, Citi and UBS still exhibit strength. For example, Citi and Bank of America shine in the announced global M&A table (numbers four and five, respectively). In the global bookrunner debt capital market 2009 league table, year-to-date, Citi is number three, Bank of America number four, whereas Credit Suisse is number 11. And in the global investment banking revenue 2009 league table, Bank of America sits at number three, Citi at number five and UBS at number six compared with the so-called winners: Deutsche Bank at number seven, Credit Suisse at number eight and Barclays at number nine.

It is fashionable to dismiss league tables with an airy "Oh, we refuse to compete by purchasing league table volume". I have always been a believer in league tables: they tell you who is doing primary business with clients and then, if you look at a bank’s quarterly results, you can see who is also making money. According to the league tables, it is too soon to dismiss Bank of America, Citi and UBS. Also HSBC, which proved itself a winner last year, has a particular strategy in investment banking: to focus on financing and mirror its emerging market franchise. In 2008, HSBC’s global banking and markets division contributed some 40% of the group’s pre-tax profits, and in the first quarter of 2009 this division achieved a record pre-tax profit. Finally, big might not be best. There are a number of smaller advisory firms sprouting and flourishing that might gnaw at the margins and business of the big boys. Before we proclaim a new hegemony in investment banking, let’s at least see how 2009 develops.

Board at JPMorgan

JPMorgan has done well in the dark days: the press have christened its chairman and chief executive, Jamie Dimon, the new king of Wall Street. The bank avoided major balance sheet blow-ups in 2008, gamely gobbled the carcass of Bear Stearns (as well as Washington Mutual) and repaid taxpayer funds at the earliest opportunity. However, the bank is not perfect and we should not fall in to the trap of genuflecting hagiography. Am I the only commentator to note that in mid-January, on the fourth-quarter 2008 earnings call, Dimon talked about an obligation to pay the dividend? According to a transcript of the call from Seeking alpha, Dimon said: "We feel pretty good about it, so we’re not that concerned about it... it should be consistent and steady." Less than six weeks later, the firm slashed its dividend by 87%, citing "extraordinary times". That’s hardly consistent or steady, and shareholders who relied on reasonable dividend income from one of the bluest of blue-chip stocks are suffering.

The bank can also come across as sanctimonious. For example, in the fourth-quarter 2008 earnings release, Dimon comments: "We are doing our part to help stabilize the financial markets and hasten recovery. We assumed risk and expended resources to assimilate Bear Stearns and Washington Mutual. We continued to lend in a safe and sound manner – extending more than $100 billion in new credit in the fourth quarter alone... We also prevented more than 300,000 foreclosures and we plan to help more than 300,000 more families keep their homes through mortgage modifications over the next two years. In addition, we currently have billions invested in renewable energy projects, including wind farms and solar facilities, to provide green energy for the current and future generations."

So can it be true, therefore, as The Wall Street Journal reported in late March 2009, that JPMorgan owns four corporate jets? Indeed the paper reported that the bank, in a fit of Tarp-induced navel-gazing, had cancelled the $130 million purchase of an additional two Gulfstream aircraft and the renovation of a state-of-the-art jet hangar. A JPMorgan insider insists that the bank was not adding to its pool of jets but replacing two older models. Now that JPMorgan is free of the trammels of Tarp, will the new jets be de-jettisoned, I wonder? Indeed, what do those 600,000 families, cited in the fourth-quarter statement, who are desperately trying to avoid losing their homes, think about a lender whose senior executives flit through the skies in four private jets? And how does all this excess carbon expenditure fit with the bank’s professed passion for green energy?

With these questions churning in my mind, I turned to the leadership section of JPMorgan Chase’s website. It is a relatively small board: 10 outsiders and Jamie Dimon. There are heavy hitters on the Morgan board, such as David Cote, chairman and chief executive of Honeywell, or William Weldon, chairman and chief executive of Johnson & Johnson. But I wonder how much time such busy men are able to devote to the complex affairs of a big bank battling the worst recession since the Great Depression.

The rest of the board is eclectic and few have extensive financial experience. Take William Gray, for example. Gray is chairman of Amani Group. I have heard of Armani. I‘ve heard of the Aman hotel group, but until now I was unaware of the Amani Group. The website describes Amani as a "full-service consulting firm". It looks to me more like a lobbying group. Isn’t President Barack Obama on record as wanting to reduce the influence of such firms? Amani also provides diversity counselling – its website states: "We assist our clients in developing strategies to create workforce operational infrastructures that maximize efficiency and productivity." I have no idea what that means but then I am not as clever as the consultants who work for Amani. Perhaps they could advise on the make-up of JPMorgan’s board, which strikes me as overly white and American for a global financial institution. Gray has a master’s degree in divinity from Drew Theological Seminary and a master’s degree in church history from Princeton Theological Seminary. I’m sure this is an excellent academic grounding but where’s the link to finance?

Board member Lee Raymond is the retired chairman and chief executive of Exxon Mobil. So obviously he knows a lot about the oil business. But last time I looked, JPMorgan was a bank. During his tenure at Exxon, Raymond did a fine job for shareholders. But he was president of Exxon during the accidental Exxon Valdez oil spill. Although it happened a long time ago, this is still considered one of the worst environmental disasters caused by human intervention. Isn’t this cognitive dissonance when juxtaposed with JPMorgan’s devotion to the environment?

Another board member, Stephen Burke, is president of Comcast Cable Communications, a cable television business. Burke must understand how to run a communications technology company but that’s not what JPMorgan does. Burke has an MBA from Harvard. I presume he knew Dimon there. They both graduated in 1982.

Laban Jackson Junior is chairman and chief executive of Clear Creek Properties. Jackson, a graduate of the United States Military Academy, was also until recently a director of Home Depot. In 2007, didn’t former Home Depot chief executive Bob Nardelli negotiate a controversial $210 million separation package on his way out the door? I’m not sure that was corporate governance’s finest moment.

JPMorgan is to be congratulated, however, for having more than the standard one token female on its main board. Crandall Bowles is chair of Springs Industries, a windows home furnishings company. She is also a member of the South Carolina Climate, Energy and Commerce Advisory Committee. Shouldn’t she therefore be urging the bank to sell its private aircraft and so reduce toxic carbon emissions? The other woman on the board is Ellen Futter, president and trustee of the American Museum of Natural History.

I find JPMorgan’s board intriguing in that, although the members are impressive in their respective fields, few have in-depth financial expertise. Some argue that a successful senior executive will by default have an excellent grasp on the key issues facing a financial firm. I’m not convinced. I believe the world is moving to a situation where bank boards will be populated by accountants, financiers or regulators. JPMorgan is doing well today but, should it stumble (and remember we still have the consumer and the commercial real-estate shoes to drop), the board will be scrutinized. Board turnover is not good for the share price. On June 22, the Bank of America’s share price tumbled 10%, substantially underperforming the market, when news spread that two Bank of America board members had resigned (bringing the total number of departing board members to seven since April 2009). As the good times roll, senior bankers may forget the pain we have endured. But regulators remember and they will demand more checks and balances. A wise source mused: "In the current environment, I question how long Dimon can hang on to both the chairman and chief executive title."

Credit crunch = females forsake finance

Normally, the way information about a financial firm is presented to the world is funnelled through the corporate communications team. Corporate communications is one of the most difficult jobs in a bank. On the one side, snarling reporters, grumbling about extortionate executive pay and excessive risk-taking, snap at your heels. On the other side, snarling senior executives, grumbling about misinformed press coverage and mixed messages, snap at your heels, It’s hard to walk without tripping up. "During the worst of the crisis," a senior bank communications officer sighed, "the bankers were complaining about appalling press coverage and that it was all my fault. I had to explain that the coverage was awful because we had lost billions of dollars that quarter." A top press relations expert told me: "Press coverage mirrors the strategy of the business. It’s not the other way around. Smoke and mirrors don’t work and you only get to lie once."

I am pleased that two women corporate communication executives whom I think highly of have recently been promoted.

Danielle Romero-Apsilos, director of corporate affairs at Citi, has been promoted to run global corporate communications for the investment bank. And Gavin Sullivan, managing director and head of corporate communications for the EMEA region at Credit Suisse, has been elevated in that she joins the EMEA operating committee. She is the only woman on that committee. However, another Credit Suisse, European-based woman whom I like, Marisa Drew, co-head of the global markets solutions group EMEA, sits on several of the firm’s other committees.

As regular readers know I am perturbed by the exodus of senior women from the industry in the past 18 months. Credit crunch has equalled females forsake finance. I was reminded of this when contemplating the seating plan for the top table of the EuromoneyAwards for Excellence dinner. There were two senior female financiers and 17 senior male executives. "This is dreadful," I wailed to my editor. "None of these men want to sit next to another man at dinner." "Nonsense," my editor said robustly. "They will talk business. They love it!"

The next day, I met a bank chief executive. "Abigail, I do very few dinners," Chief said. "However, I have a strong relationship with Euromoney so I will attend your dinner. But I have to be seated next to someone interesting and I prefer to sit next to women." I rest my case!

How was your month? Please send news and views to abigail@euromoney.com.