This morning, UBS reported a third consecutive decline in quarterly net profit and announced it would close its hedge fund, Dillon Read Capital Management, run by John Costas. Apparently there were losses in the US mortgage market. Proprietary portfolios will be re-integrated in to the investment bank and client funds will be redeemed. John Costas will help with this transition and will then become a ‘special advisor to the group executive board.’ Today, in a press release, Peter Wuffli, group CEO said: “We concluded that the DRCM initiative did not meet our expectations.”
I was probably the only commentator to criticize openly the ‘bizarre saga' of Dillon Read Capital Management, the in-house hedge fund started in July 2005 by John Costas, previously head of UBS’ investment bank. As an ex-investment banker, I have a nose for nuances and the saga smelt wrong. Calls to UBS press officers to discover how the new venture was faring were met with a firm: “No comment.” And now the game is up. One-upmanship: More next week.
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This week, the Sunday Times published its 2007 rich list. The list claims to be the definitive guide to the richest 1,000 people in Britain and Ireland. Since 2006, the number of billionaires has risen by 14 to 68 and the richest 1,000 increased their fortunes by 20%, to almost £360 billion.
The reaction of my rich friends was interesting. Those who appeared, gloated, those who did not, sulked. One wealthy fund manager, noticeable for his absence, harrumphed: “It’s a charter for kidnappers. I’m relieved that I am below the radar screen.”
I am concerned that the feel-good factor is limited. In London, the wealthy now lead a parallel existence. The gulf between the ‘haves’ and the ‘should-haves’ has become a muddy and dangerous trench. A key theme of Blair’s Britain is the dwindling living standards of the middle classes who are not involved in finance. “There’s planet Finance and planet Everyone-else,” one non-City pal grumbled.
Oh Henry
A friend, Lucy, is a leading lawyer who specialises in medical negligence. Her clients do not pay fancy rates. She is fortunate in that she owns (with a hefty mortgage) two flats in Holland Park. She and her family live in the larger flat while her invalid mother lives below in the granny flat. “If interest rates go up twice more,” Lucy said, “I will probably go bankrupt. The granny flat will be re-possessed and my mother will have to live with us. So I’ll go mad as well.”
Lucy recently had dinner with a friend she has known since adolescence. The friend, Henry, is now one of London’s most famous hedge fund managers. Lucy was bemused (as anyone outside banking would be) at the paraphernalia that accompanied them to dinner. “He put his mobile phone and this BlackBerry-thing on the table. His nails were ragged and bitten,” she recounted. “I said: ‘Henry, you’ve made so much money. Why can’t you just relax?” To which he retorted: “Lucy, you have no idea how difficult it can be looking after all the money you’ve made.” Henry’s problem is one many people would like to have. However, over the years I have learnt that happiness is about attitude and not bank balance.
ABN in slo-mo
Rijkman Groenink, ABN’s chief executive is probably not very happy at the moment. And he is definitely not happy with the hedge fund community. The battle for ABN has turned nasty. On Saturday, a Dutch court heard a petition from VEB, the Dutch investor group, to halt the sale by ABN of its US bank, LaSalle, to the Bank of America. Groenink denied that the sale was a “poison pill” to frustrate a higher break-up bid by the RBS consortium. “I trained as a lawyer,” he thundered, “but I never thought I would have to stand before you as a lawyer for my own company. This is a very sad occasion. ABN has become the toy of hedge funds and I deeply regret that.”
For me, the ABN saga has become a movie in slow motion: think of those pictures of competing runners in the film Chariots of Fire. I was amused that Barclays beavered away for over four weeks with its five advisors and numerous working parties to arrive at its €66-billion bid last Monday. A mere 48 hours later, the RBS consortium announced a counter-offer of €72 billion without undertaking due diligence and assisted by only one investment bank, Merrill Lynch. I have always believed that less is more. So John Varley would be ill advised to get carried away and offer more for ABN. It is all too easy to see how such a high profile deal could quickly degenerate in to a battle of egos. “John Varley’s not like that,” a source insisted. “He’s thoughtful, focused and extremely unassuming.” Nevertheless, Sir Fred Goodwin and Ken Lewis strike me as better street fighters.
LaSalle on
I am baffled as to why Ken Lewis, Bank of America’s chief executive, is so keen on LaSalle. Bank of America is already the largest retail bank in America and is pushing against the regulatory 10% cap for retail deposits. “LaSalle is a coveted asset for us,” a mole confided. “It plugs one of the very few gaps we have in our US network.” However, less than 10% of BoA’s revenues come from outside America. Shouldn’t Lewis be concentrating on foreign expansion? I realise the weakness of the dollar hinders such a strategy, but to protect his legacy as the doyen of dealmakers, Lewis needs to move on to the international stage.
Opportunity
And talking of the international stage, I recently caught up with Lehman Brothers’ chief executive for Europe and Asia, charismatic Jeremy Isaacs. Jeremy hides an extremely sharp brain beneath a suave exterior and he is excellent company: amusing, articulate and unusual. I was impressed by his passion for the diversity agenda. I confided in him a difficult episode from my past life as a banker when a male boss over-stepped the line. Jeremy shot back: “I would have fired the guy the next day. Leadership on these issues needs to come from the top.” Last week, Lehman won the employer organization Opportunity Now’s 2007 global award for its Encore programme. Encore is a recruitment initiative targeted at those who have left the financial services industry. In reality, this means women. “Encore is about driving cultural change and rethinking the model,” Raj Ray, head of diversity at Lehman, Europe, told me. Some other investment banks are now espousing the ‘We encourage women’ agenda. But I applaud Lehman’s senior management because they acted while others sat around mouthing platitudes.
Performance
Does the mighty Chuck Prince, Citi’s chief executive, read the ‘Abigail with attitude’ column? Two weeks ago, I wrote that Prince must hope Chris Hohn, founder of activist hedge fund, TCI, would not turn his beady eye Stateside. This Monday, a headline on the front page of the Financial Times stated: “Citigroup chiefs fear break-up move from activist hedge funds.” You know what? It’s only a matter of time before there’s a break-up of HSBC or Citi. Size does not matter anymore; it’s performance that counts. So does the Barclays/ABN deal make sense? What do you think?
Next week: Geneva – a provincial backwater or a future financial hub? Please send news and view to abigail@euoromoney.com.