I’ve never been a big believer in size. Perhaps it’s because I’m diminutive in stature and so have a Lilliputian perspective on life. Micro is magnificent for me. Would the iPod be so endearing if it were a galumphing gadget? The whole phenomenon of the boutique hotel equates small with special. As the press salivates about the 555-seat Airbus A380 superjumbo, I salute the Cessna Citation, a private plane perfectly proportioned for two passengers. How would you rather travel? I therefore distrust the current “sizeist” obsession in banking circles. And to continue with my Morgan musings from last week, why is the behemoth that is JPMorgan Chase a good thing? Over 170,000 people work for it. As one friend put it: “They have as many employees as the civil service of a middle-size state.”
Morgan Chase has six business lines: investment banking, commercial banking, retail financial services, card services, treasury and securities services, and wealth management. During an investor call in early May, chief executive Jamie Dimon was asked why an investor should own such a conglomerate rather than the constituent parts. Dimon riposted that Morgan Chase was not a conglomerate because its businesses were all related to each other.
Mr Dimon might wish to consult the Compact Oxford English Dictionary which defines a conglomerate as “1 something consisting of a number of different and distinct things; 2 a large corporation formed by the merging of separate firms.” Note to Jamie, find a better “spinmeister”. If he’s not too busy preparing his diaries for publication, Alastair Campbell might be looking for a new sinecure.
On the call, Dimon struggled to rationalize why an investor should buy his stock rather than that of a pure play such as Goldman Sachs. “I don’t think we’re best in class in any business quite yet,” he admitted. Refreshingly honest but hardly a winning slogan.
Dimon also slipped when asked: “What is the JPMorgan brand?”
“I’m not sure I understand the question,” he stalled. Was Mr Dimon suffering from a touch of bird flu that day? As far as I’m concerned, a chief executive who can’t describe his company’s brand should hand the firm over to the private equity boys and spend more time with his family.
And what of the investment bank itself, JPMorgan? Many argue that it’s on the way up. Its league table positioning across most sectors is stellar (but these can often be league tables of non-profitablity) and it is viewed as a fearsome competitor. However, return on equity is low and trading profits volatile in a bad way. “Why can’t they get trading right?” I asked several commentators. No one had an answer. I wonder if investment banking co-heads Steve Black and Bill Winters have one? Black is the Dimon boy (from way back in the Travelers days) and Winters (“the George Clooney of investment banking”) is the Morgan man. “Is Winters long for this world?” an ex-Morganite asked. “He’s very clever. Surely, he must be off to join a hedge fund soon.”
Dimon argues that the benefits of size for a financial services firm include diversification of earnings, as well as economies of scale in systems, operations and branding. I hold a different view. If investment banking falters, there is no inherent reason why your commercial banking and asset management businesses should flourish. And how robust will the American consumer be, especially in a bear market when interest rates are rising? So where’s the diversification play?
Compare the share price of the financial hypermarkets such as Bank of America, Citigroup and JPMorgan Chase with the investment banks like Goldman or Lehman. JPMorgan Chase’s share price has risen approximately 12% since the date of the merger with Bank One, (July 1 2004), in a bull stock market and highly profitable banking and trading environment. Lehman stock is up 77% during the same period. I know which one I would have liked to own. And what do you think?
In any event, if I wanted to own a diversified financial company, I would buy HSBC. HSBC has significant exposure to Asia, which even my septuagenarian mother knows is the future. Americans are starting to realize this too. Warren Buffett has suddenly learnt how to spell international and in April, my friend Frankie, the archetypal American entrepreneur, wanted to change a million dollars into Chinese yuan.
“You’re taking a huge punt,” I sniped over dinner at Harry’s Bar, a fashionable London private club. Frankie gave me a withering look that meant: “Little woman, don’t concern yourself with financial matters.”
Nevertheless, I would say the same thing to an investor thinking about buying JPMorgan Chase stock: “You’re taking a huge punt on the ingenuity and vision of one man, Jamie Dimon.” I have never been an advocate of the 2+2=5 philosophy. Instead of investing in the house of Morgan, I will therefore spend the housekeeping money on a frothy Ferretti frock when I go to Milan tomorrow.
And so the Studs saga staggers to a close. John Studzinski, co-head of HSBC’s investment banking division, is leaving to join private equity group Blackstone. “He will be arm candy for their European business,” my mole sniffed. “But with limited management responsibility.”
Like me, Studs now seems to prefer little to large. In his valedictory HSBC press release, he states: “The opportunity to work in the very different environment of a smaller, private partnership... was something I found irresistibly attractive.”
But who hired Studs? Is it true that some senior London Blackstonians were unaware of this crucial appointment until it hit the newswires?
“Was he pushed or did he jump?” they are asking in City taverns. It seems the discussions over Studs’ future role at the bank might have continued for some time but, once the end was in sight, the announcement came very quickly. Maybe there wasn’t time to communicate the news to everyone concerned – HSBC has become something of a leaky ship in recent months.
For me, however, the crucial question is what will happen to HSBC’s half-built investment banking franchise? As one source commented: “Studzinski had a Herculean task and he only ran half the business.”
Stuart Gulliver is now in sole charge of HSBC’s investment bank. I wish him luck with the challenges that lie ahead.
In Studs’ gilded career, his time at HSBC will always be marked as a relative failure. Perhaps the institution didn’t match his personality – how often do I hear an HSBC investment banker preface a point with the words “We’re HSBC, we’re a conservative institution.” Blackstone might be the environment in which Studs can thrive again.
Back to Harry’s Bar, where a key cluster of Barclays’ bankers dined recently. Messrs Naguib Kheraj (finance director), Chris Grigg (group treasurer), Richard Boath (head of FIG at Barcap) and Paul Avery (“not sure what he does” the switch-board sweetie informed me nonchalantly, but unfairly, as Avery is a FIG heavweight), were apparently celebrating a special occasion. Knowing the integrity of these gentlemen, I am certain they will not be charging dinner to an expense account. Bills at Harry’s Bar tend to be hefty. Anyway, such an invoice would never get past the beady eye of controversial Barclays chief operating officer Paul Idzik. A tennis whiz, he would lob it back to his former Barcap colleague Kheraj.
Excessive restaurant tabs run up by his employees are a sore point with distinguished Barclays’ president Bob Diamond. Remember all the press brouhaha in 2001 when a gang of Barclays Capital derivative staff spent £40,000 on dinner at Petrus, a posh London eatery? But then a lot of things have changed at Barclays Capital since 2001.
Bob Diamond, unlike Jamie Dimon, doesn’t have a problem with the B word. Diamond understands what the word brand means. Only too well some might say. And next month, I will take a closer look at “The brand of Bob”.
Please send news and views to Abigail@euromoney.com.