It is the question every financial journalist, let alone an editor of a banking title, still struggles with today: how on earth did we get that so wrong?
With hindsight, of course, it is easy to see the warning signs that foreshadowed the global financial crisis of 2007/8 and its terrible aftermath. And Euromoney, as did many other specialist titles, saw a lot of red flags: the impending downturn and possibility of a sharp correction in the US sub-prime market (our November 2006 feature: ‘Has Wall Street gone sub-prime at the wrong time’); the over-complexity of financial products (our December 2006 cover story: ‘Clever ways to do the dumbest things’); and the increasingly lax covenants in leveraged instruments (our June 2007 cover story: ‘From the sub-prime to the ridiculous’).
But did we, as a group of senior editors and journalists, with decades of experience in finance and a particular knowledge base in fixed income at the time, foresee the turmoil that was to follow? The answer is, quite simply, no we didn’t. No story better illustrates that than our July 2006 cover story on Merrill Lynch, in which we also gave the firm the award for best global investment bank.
Some of our awards are controversial, sometimes dare I say deliberately so. I can’t remember any criticism of our choice in 2006. Stan O’Neal’s firm had restructured, cut costs, diversified into faster-growing businesses and was back firmly in Wall Street’s top echelons.
Merrill may, as we wrote, have had “return on equity figures that still languish at around 17%, several points behind its peers such as Goldman Sachs and Lehman Brothers”. (How full of irony that sentence reads now). But by the end of 2006 our decision looked even more vindicated, as O’Neal’s Merrill posted record profits and a share price 40% up on the year.
How smart Merrill’s management were and weren’t we a bit clever to spot the firm’s revival too.
I shudder now to read the following passage: “Euromoney: One area you are on the record as wanting to build, through acquisition, is the US mortgage business. How can you make inroads into the incumbents such as Lehman Brothers and Bear Stearns? O’Neal: We would not do it if we didn’t think we would have some way of making our offering distinctive.”
Merrill, of course, did distinguish itself in sub-prime. First it was late to the game. By the end of 2006, when even Euromoney had written of the warning signs, it bought originator Franklin for $1.3 billion, a decision that later cost far, far more than that. It also later revealed a lax risk management culture and a willingness to hold on to bad positions longer than its competitors. A little more than two years after it won our award, Merrill was forced into a merger with Bank of America to ensure its survival.
After O’Neal was ousted in 2007, I had time to reflect on what I had missed. And the biggest mistake I made was not to see the warning signs in Merrill’s culture under O’Neal. First were the tortuous negotiations to secure an interview, which lasted over a year. By the time our interview took place, O’Neal had been chief executive for five years and yet this was his first major interview. What was he hiding from?
With the honourable exception of Greg Fleming, then head of global markets and investment banking and later the man that, through many sleepless nights, brokered the deal with Bank of America, most of the O’Neal management team were sycophantic acolytes, easily mistaken as loyal lieutenants. O’Neal was a loner, who insisted on having his own lift to the firm’s executive floors and who preferred to play golf on his own. In good times, the culture worked; in bad times, it quickly turned toxic.
Lessons learned? I hope so.
I am particularly proud, post crisis, of Euromoney’s ability to help set agendas in financial markets. In 2007 we tried to do just that with our September cover story, ‘The new colour of money’, on how banking and markets could play a huge role in combatting climate change.
I interviewed Al Gore, the former US vice president, who had recently changed thinking on climate change through his documentary ‘An inconvenient truth’. He told us then: “I believe that markets will find more efficiency and superior performance by fully integrating sustainability values.”
It took a long time for that to happen. The financial crisis first got in the way and then made banks realize that they had to show they were more than simply money-making machines. But for sure, it is happening now. It is an important agenda for just about anyone running a bank today.
This is one story that, in hindsight, we got right. In the past 18 months Euromoney has run in-depth reports on areas such as financing climate change, the advent of blue finance to help clean the world’s oceans and the rise of impact banking. We have dedicated coverage of sustainable and responsible finance on a rolling basis.
Euromoney’s coverage has always adapted to changes in the industry. Here’s to my successors, and the fun they will have doing that for the next 50 years.
Clive Horwood first joined Euromoney in 1993. He has been editor since 2005.