Abigail with attitude: Banking's convoluted calamity

I am reminded of an excerpt from Percy Bysshe Shelley’s famous poem Ozymandias:

“My name is Ozymandias, king of kings.
Look on my works ye Mighty, and despair!”
Nothing beside remains: round the decay
Of that colossal wreck, boundless and bare,
The lone and level sands stretch far away.

I’m not sure whether I am Ozymandias or if that honour is reserved for Credit Suisse. But we both lost a lot of credibility in February. On February 18, I emailed a friend who is a very important bank chief executive. ‘‘Dear chief,” I wrote. “Might I suggest that you look at Credit Suisse’s fourth-quarter results’ presentation? They gave an impressive amount of detail about their investment banking exposures and write-downs. This went down very well with the analysts and media. In fact, on the call, one analyst said that Credit Suisse’s disclosure was ‘best in class’.”

Less than 24 hours after my email and a week after reporting respectable fourth-quarter 2007 earnings, Credit Suisse stunned the market by announcing that it would write down an additional $2.85 billion in the first quarter of 2008. This disclosure seems to have been prompted by the closing of a subordinated Credit Suisse bond issue on February 19 2008. Credit Suisse said the additional write-downs resulted from further market deterioration and “mis-marking” of positions by a small number of traders. First-quarter 2008 profit would decline by approximately $1 billion but the bank would still be profitable in the first quarter.

It’s difficult to get your arms around this public relations disaster because the whole episode is so amorphous and has so many tentacles. Credit Suisse is conducting an internal enquiry that should be completed by mid-March. “Analysts want to know if there will be an effect on 2007 earnings. Reporters want to know if there’s been fraud,” an insider told me acerbically. Another knowledgeable source said: “Senior management probably can’t believe their bad luck. If only this had come to light a week earlier, they would have played things very differently.”

Credit Suisse’s untimely discovery is bad news for Brady Dougan, the firm’s workaholic chief executive, bad news for Paul Calello, who runs the investment bank, and very bad news for the traders involved. Where, by the way, is Walter Kielholz, chairman of the bank in all this? He is keeping an ominously low profile. However, Brady Dougan is not even on the main Credit Suisse board that Kielholz chairs and whose mandate is “The overall direction, supervision and control of the group”.

Note to Mr Kielholz: Shake a leg, man. Do try and lead from the front.

More important, Credit Suisse’s convoluted saga is a calamity for the banking sector as a whole. After Credit Suisse issued its fourth-quarter results on February 12, you could sense a collective sigh of relief. The awful and awesome announcement a week later (the firm implied that they could write down more in the first quarter of 2008 than in the whole of 2007) will lead people to assume that banks don’t understand the numbers they are dealing with and that the numbers that are reported are not reliable.

A source said: “Look, these instruments are mega complex. It’s a 24/7 job monitoring them.” I heard about a consultant wizard who was brought in by a US bank to examine its CDO exposure. “Show me the positions,” said the wizard grandiosely – and nearly fainted when he was presented with 300 pages of computer printout with 100 bonds on each page. A head of fixed income at a top US bank told me that most of his time in recent months had been spent worrying about valuations and then triple checking the valuations on these sort of positions.

This brings me to the question of accountability. Where does it lie? Is it with the traders involved? Credit Suisse’s London-based head of collateralized debt obligations, Kareem Serageldin, has been suspended until the internal review is completed. Or is it higher up the totem pole? For a while now, I have been dubious about Michael Ryan, Credit Suisse’s head of securities, who oversees both the equity and the fixed-income division. Ryan was hired from Goldman Sachs last summer and has a strong equities background. I imagine Dougan was only able to lure him to Credit Suisse by promising him a larger role than he had at Goldman. Hence Ryan added fixed income to his portfolio. Cometh the hour, cometh the man and all that. Credit Suisse’s senior management might need to confine Ryan to equities and bring in someone else to run the fixed-income division.

And as for me? Well I had to eat a portion of humble pie. I emailed chief again: “Perhaps Credit Suisse’s disclosure wasn’t so perfect after all!” And chief, in the spirit of ‘there but for the grace of God goes I’, was magnanimous. “Abigail,” he replied. “Let’s talk about it over a coffee or, even better, something stronger!”

When is a president not a president? When regime change looms. Does anyone care what Dubya thinks or does any more? If you pay attention to the braying press packs, the only people of political stature at the moment are senators Clinton and Obama. There is even an outside chance that the previous president, Bill Clinton, is receiving more column inches than the current president.

A mole whispers that the situation at Merrill Lynch might be similar. Towards the end of his reign, chairman and chief executive Stan O’Neal appointed two co-presidents, Greg Fleming and Ahmass Fakahany. Fleming was an investment banker, Fakahany an operations guy. When O’Neal left the company in October 2007, insiders opined that it was only a matter of time before Fakahany followed. This came to pass in February. But where does that leave former Merrill co-president (but now sole president) Fleming?

The new chairman and chief executive of Merrill is John Thain, whose previous roles included president of Goldman Sachs and chief executive of the New York Stock Exchange. A cynic talks about moves to ‘Thainize’ Merrill following the rapid appointment of Thain’s former colleagues Nelson Chai, Margaret Tutwiler and Noel Donohoe. A mole muses: “When Stan started as chief, he didn’t have a president, so does Thain need one? And if Thain wants to move to a flatter management structure, again is there a need for a president?”

Fleming is a highly talented deal-doer who was rumoured to be a contender to succeed O’Neal. But could it be that Fleming has made some enemies on his meteoric rise to the top? A story posted on a tawdry website made scurrilous allegations without citing any named sources. A grovelling correction then appeared. Fleming is a fighter and a stayer. It will take more than salacious tittle tattle to make him move on.

But whenever I meet senior investment bankers now, the chatter inevitably turns to the involuntary exodus from the industry. “I can’t remember a time when so many senior bankers lost their jobs at the same time,” one chief confided, nervously masticating his poached sea bream over lunch in the wood-panelled executive dining room (I thought all investment banks were greener than green today. Perhaps it’s time to change the decor? Oops, I suppose there’s no money to spare for such fripperies). In a previous column, I have discussed the drip-feed of talent deserting investment banks during the past five years for the more verdant pastures of private equity and absolute returns. The departures during the past six months were motivated less by greed and more by accountability. Although, in a way, this also comes down to greed. If O’Neal had not undertaken a mad dash for growth (simultaneously increasing Merrill’s risk profile) by expanding the firm’s sub-prime franchise, he might still have a job.

The dilemma for the industry is that there is a big gap between the highly experienced old guard, such as O’Neal or Jimmy Cayne, and the next rung down, who were being groomed for greatness when things blew up. The investment banking industry thus has a lot of 40-something claimants (often doing regional jobs) for whom it would be challenging to be promoted to the next level. Some would sink under the mantle of supremacy, others would swim. And thus we have a powerful paradox: the top managers, who are highly experienced, have gone because they were too closely associated with the losses, and the aspiring managers are not quite experienced enough to take over. This is the reason why Marcel Ospel, chairman of UBS, and John Mack, chief executive of Morgan Stanley, have so far kept their jobs despite large write-downs at both institutions.

This paradox is perhaps well illustrated by comparing Citi and Merrill. Fifty-two-year-old John Thain was appointed chairman and chief executive of Merrill Lynch, effective December 2007. Fifty-one-year-old Vikram Pandit became the chief executive of Citi in mid-December 2007. So the 100-day anniversary looms for both men. And what I am hearing is that Thain is thriving while Pandit is pedalling hard to stay still. A mole reports that Thain is a messianic whirl of energy and that he struck exactly the right note in a recent firm-wide employee ‘town-hall’ update: “Authoritative and reassuring,” mole whispered. “He reached out rather than distancing himself and even exhibited a good sense of humour. When asked a question about wealth management, he said: ‘I’d like to exercise my option to call a friend.’” And Thain then passed the question to Bob McCann, Merrill’s head of wealth management. “For Merrill, appointing John Thain,” another source said silkily, “was like opening the window and letting fresh air in. They were lucky to get him.”

Meanwhile, over at Citi, it’s difficult to ascertain what’s going on. The title of the movie would be The big silence. Pandit did achieve a large capital infusion in January 2008 and Citi’s share price promptly fell 7%. In the bank’s fourth-quarter results’ release, Pandit announced 4,200 job cuts. He has been criticized for offering a hostage to fortune by mentioning a precise number. This difference comes back to the experience gap. Thain has already appeared at the top management table (twice in fact: Goldman and NYSE); Pandit has stepped up to a much bigger job. In the past, Pandit ran a division of Morgan Stanley and then a medium-sized hedge-fund (Old Lane Partners had some $4 billion under management). It would have been highly challenging even for more experienced individuals such as Josef Ackermann or Larry Fink, who were astute enough to turn the assignment down.

And talking of individuals who take on chunky challenges, UBS has announced the appointment of a new investment banking chief executive: Jerker Johansson, a 22-year Morgan Stanley veteran. This appointment bemused commentators. First, Jerker is an equity specialist (he ran Morgan Stanley’s equity division for several years). Secondly, Jerker, viewed as a close ally of Morgan Stanley’s former president, Zoe Cruz, was sidelined after she left the firm last November. In fact, worse than being sidelined, the dreaded title of vice-chairman was bestowed upon him.

Devoted readers will know that, for me, the title vice-chairman is equivalent to being on a life-support machine at an investment bank. The title is normally proffered after someone has been demoted from a proper job: its aim is to enhance ego but it rarely carries executive responsibility. In a previous column, I railed: “The initials VC are synonymous with virtually comatose and voiceless cipher.” If management offers you a vice-chair, leave. And that is what jilted Jerker has done.

A source said: “Jerker is a nice guy and very able. Of course, he’s not über-charismatic like Mack but then he’s a Swede and they’re always a bit low key.” However, UBS needed someone who had a stronger fixed-income background (which is the problem area). Also, I often find that individuals who have been at one firm for a long time don’t travel well. Especially when the firm they grew up at was a powerful franchise like Morgan Stanley. Business walked through the door at Morgan Stanley because of the name. It will be very different at demoralized UBS. Jerker will have to adjust quickly and, at 51, he might be less flexible than a younger man.

With all this turmoil, one might miss some intriguing stories emanating from a firm that has surfed the tidal wave of sub-prime quite adroitly. I’m talking about Lehman Brothers. In February, Roger Nagioff, the London-based global head of fixed income, retired after nine months in the job. This is disconcerting. Nagioff is leaving to spend more time with his young family.

Roger’s appointment was heralded as significant because he would be based in London and commute to New York one week in four. However, the credit crunch meant that reluctant Roger had to spend at least two weeks a month in New York, so his personal life became untenable. “I couldn’t give the job the 1,000% it deserved,” he told me. “These decisions are always very difficult. But in the end because this is a US-centric crisis, I would have had to move to New York and for personal reasons, I am not in a position to do that.”

I have some sympathy with Mr Nagioff’s dilemma and it is certainly courageous to leave a fantastic job at the pinnacle of your career.

Top banking jobs are all-consuming and total dedication is one of the rules of engagement. Too many senior bankers forget that there’s more to life than basis points and bridge-loans. Nevertheless, Dick Fuld, Lehman’s chairman and chief executive, must have been disappointed by this outcome. An insider insists: “Roger was a great guy and a fabulous trader. This was purely a personal decision and is not related to any issues in the business.”

Forty-six-year-old Andy Morton, previously co-chief operating officer of fixed income, succeeds Nagioff. I hear good things about Morton who is reputed to be a mathematical genius and invented an option pricing model. May Morton’s tenure prove more tenacious than that of his predecessor!

On Valentine’s Day, Dick Fuld could have been forgiven for emitting smoke rather than roses from his nostrils when he read an article, “Debt crisis hits a dynasty”, on the front page of the Wall Street Journal. According to the paper, workaholic brothers Brian and Basil Maher sold their family’s shipping business last July for more than $1 billion and assigned part of the proceeds to Lehman with instructions to manage the money conservatively.

Sixty-one–year-old Brian Maher is quoted: “We didn’t think we were taking risks. We read all about the troubles in the credit markets and said, ‘I’m glad we’re not invested in that stuff.’ It turns out we were.” The Mahers claim they have lost $286 million because Lehman invested in auction rate securities, previously viewed as a quasi-cash instrument but where liquidity has recently shrivelled. A lawsuit is now in full swing. Lehman asserts that it has “meritorious defences” against the Mahers’ claim. A Lehman spokesperson said: “In the Mahers’ signed contract they designated both their general counsel and the CFO of a well-known investment bank as authorized to act on their behalf. In addition, these investments were within the investment parameters set by the client.”

As day follows night, there will be more lawsuits when investors tot up the amounts they have lost in recent months and their lawyers work out how these losses can be pinned on overzealous investment bankers. What is not so obvious is whether the high-profile casualties of the sub-prime catastrophe will be rehabilitated. Rumours were flying around the London market in February that Osman Semerci, the former head of fixed income at Merrill Lynch, might resurface at Deutsche Bank. But it never happened. Tom Maheras, who left Citi last autumn, was supposedly on the short list to head UBS. Again it never happened. I’m not sure it will be easy for any of the fallen heroes to regain a foot on the ladder. “There’s a reluctance to appoint people who’ve been associated with such big losses,” a top head-hunter tells me. Note to departed financiers: “Think about a change of career. I hear there’s huge demand for street-sweepers. That way, you can clean up mess rather than create it.

As promised in my February column, I list below the top five personal assistants to top financiers in the London market. These ladies have total control of “The diary” and ensure that their bosses cruise through the mundane crises of life that defeat the rest of us (missed flights, domestic leaks and the perfect Christmas gift for your curmudgeonly mother-in-law). Note to head-hunters, please don’t all pick up the phone at once.

Antonella Iannuccelli (left), personal assistant to Andrea Orcel, head of global investment banking, Merrill Lynch. Warm and accessible, Antonella has worked with Andrea for more than four years. She has an unusual background – half South African, half Italian – and is trilingual. Antonella came to London in her mid-20s and started her financial career at Lehman Brothers. “I definitely enjoy my job,” she told me. “The environment is flexible and dynamic and there are always lots of things going on. In fact, I like the Blackberry age because things move faster.”

Cassie Brown (second left), personal assistant to Jonathan Moulds, president of Bank of America, EMEA and Asia. At 29, she is among the youngest of our personal assistants but no less rigorous for that. Has worked at Bank of America for 10 years and with Jonathan since 2005 when he was posted to London from Chicago. “I deal with everything that is thrown at me,” she says. “And Jonathan gives me a lot of responsibility, which I like.”

Mary Callan (centre), personal assistant to Ian Hannam, chairman of equity capital markets, JPMorgan. Mary started her career in television at Channel 4 and joined Ian in 2000 after taking a break to look after her young daughter. Ferociously efficient, she juggles Hannam’s schedule with dexterity. “The limits of resourcefulness are sometimes tested,” she admits with a grin.

Ruth Roast (second right), personal assistant to Benoit D’Angelin, partner at Centaurus Capital. Ruth started her career at Goldman Sachs and crossed paths with Benoit at Lehman Brothers when he was head of investment banking and where she worked for the head of finance and strategy. Ruth joined Benoit at Centaurus some three years ago. “It’s quite intense,” she says, “but thoroughly enjoyable, and there’s always a first time for everything.”

Laura Jones (right), personal assistant to Russell Chambers, chief executive of Credit Suisse in the UK. Laura started working with Russell 14 years ago at Merrill Lynch and moved with him to Investec, UBS and, recently, Credit Suisse. Extraordinarily discreet: “It’s been an eventful life,” she chuckles.

Please send news and views to abigail@euromoney.com. 
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