A week, they say, is a long time in politics. We now know that a week can be an eternity in the financial markets, especially when it starts with Lehman Brothers going bust and ends with Goldman Sachs and Morgan Stanley becoming licensed deposit takers so that they can snuggle closer to the Federal Reserve. Oh, and in between, you had the rescue of the largest US insurance company, AIG and the proposed Stalinization of US capitalism financed by the Land of the Free’s taxpayers.
Most people can remember what they were doing when John F Kennedy was shot or Princess Diana died. Will it be the same with that sombre September 13 weekend when investment banking died? Seasoned professionals were stunned at how quickly the world unravelled. It suddenly became apparent that those in charge were making policy on the hoof and bushfires of pandemonium snaked through the markets. Would it be too cruel to claim that Hank Paulson reminds me of the character called Baldrick in the Blackadder comedy series? Baldrick’s constant refrain is: "I have a cunning plan" as he struggles to improvize a solution, any solution, to the crisis at hand.It was hard to keep a cool head especially as, for those at the top, sleep was considered an optional extra. On the Friday when Lehman was spiralling out of business, a mole heavily involved in the derivatives market recalls working from home clad only in her pyjamas, hair unwashed and ankles swollen as one conference call merged with another. Suddenly, a request arrived that she should make her way to the Fed and deal with the braying press pack. "There is no way I can physically be present at the Fed," mole emailed trenchantly.
On balance, we are lucky to have Hank Paulson as US Treasury secretary. A caterpillar crawls down my spine when I contemplate these events happening on the watch of the previous Treasury secretary, John Snow. I was feeling sorry for Hank – numerous weekends cloistered with boring Bernanke, propping up one pillar of the financial establishment after another, dealing with surly politicians and all on a public servant’s salary. But then a source reminded me that before taking up his post, Paulson had to sell all his Goldman Sachs stock (in mid-2006 when it was trading at around $150) and the sale was free of capital gains tax.
I intend to take total credit for getting one thing right in this typhoon of turmoil – the demise of investment banks. In my August column, discussing Merrill Lynch, I wrote: "But ultimately, can an independent investment bank survive in this new era of less leverage, greater regulation, high volatility and mediocre returns on equity?" I also stated: "I don’t rule out the possibility that Bank of America may buy Merrill." Excuse me while I gloat.
However, it still leaves a bad taste in the mouth that Lehman collapsed and Merrill survived. I noted that in the last round of capital-raising that Merrill undertook, in late July, its chief executive, John Thain, bought stock at $22.50. Therefore a $29 offer from Bank of America looked reasonable: a 29% return in less than two months is not to be sniffed at. Of course if you had held on to Merrill stock since its $97 peak last January, the Bank of America offer might look a bit measly.
Oh and don’t let’s forget that previous Merrill Lynch chief executive Stan O’Neal was fired last October apparently, in part, for trying to negotiate a merger with Wachovia when Merrill’s stock price was at around $66. At the time, Dan Tully, a retired chief executive of Merrill, was quoted by a reputable newspaper as stating that Merrill’s predicament was sickening. He said: "I’ve been in touch with many of our fellow employees and ex-employees and they’re sick, everyone is sick about it, as I am too. It’s awful." One year later, I wonder how Tully is feeling. The problem with being a drama queen is that you must make your big entrance at the right moment, not two acts too early. Of course, we now know that Wachovia had significant balance-sheet problems of its own. But then hindsight is always 20/20 vision.
Bank of America’s chairman and chief executive, Ken Lewis, is said to be elated by his capture of Merrill. Some sources question why he needed to pay $29 a share for the floundering investment bank when following Lehman’s demise and with short-sellers on the rampage, Merrill’s shares would probably have opened on Monday morning at $10. ‘Ken likes to do the right thing,’ a mole murmurs. I also hear, though, that during the halcyon bull market, Ken had contemplated buying Merrill for $90 a share. So maybe he thinks he’s got a bargain. Given the problems at Citi, which appears too big to manage, it is counterintuitive that the model of sprawling universal bank is the one to imitate. In the short term, this deal was a solution for Merrill shareholders. In the long term, it might not be a fabulous transaction for Bank of America shareholders, especially as Lewis has not yet fully digested the controversial Countrywide acquisition.
If indeed it is possible to look forward more than a week in these "I don’t believe it" days, what does the future for Merrill look like under the Bank of America logo? I imagine that the retail brokerage division will be left alone. Distribution and US brand recognition must be key attractions for Lewis. The benefits of traditional investment banking are more questionable. Lewis is on record as saying, last October, after significant third-quarter trading losses in Bank of America’s investment-banking unit (where net income fell 93% to $100 million): "I never say never, but I’ve had all the fun I can stand in investment banking at the moment." Bank of America does not have investment bankers of the calibre of Greg Fleming and Andrea Orcel (or if it does, I’ve never met any of them), so it makes sense to try to keep the investment banking team together. Ken will be helped here by the fact that in today’s horrible new world, capital is king, so Bank of America might be a sensible place to shelter in for a few years. In fact, never has the adage seemed more true: "Your bonus is your job."
Of course, one man who is looking forward to a handsome bonus whatever the markets do is Merrill’s global head of sales and trading, Tom Montag. Terrific Tom, a former Goldman Sachs employee like his boss Thain, locked in to a $90 million compensation package and, after six months’ gardening leave, rolled up to Merrill on August 4 2008 to undertake a bit of light "sorting out the troubled portfolio". Within six weeks, the firm had been sold and Montag’s reporting line blurred to a question mark.
A mole who spoke to Montag on meltdown Monday chortled: "I suggested that Tom ask Ken for a pay rise. For some reason, he didn’t seem amused."
As an aside, market participants are musing about the role that Bank of America’s charming president for the EMEA and Asian regions, Jonathan Moulds, will play in the Merrill integration.
Moulds, a former derivatives trader, and a previous chairman of Isda, is a Renaissance man who collects fine violins, sits on the international council of Carnegie Hall and loves art: Bank of America is sponsoring the impressive Francis Bacon retrospective at London’s Tate Gallery. Nevertheless, it would be a mistake to dismiss Jonathan as a "laid-back, hairy creative". His gorgeous wife, Antonella, gave birth in late August to their third child and, within days, Jonathan was back at the helm providing the European perspective on all-night conference calls.
The cult of the strong leader has suffered during this crisis. The reputation of Lehman’s chief executive and chairman, Dick Fuld, went from hero to zero over the summer. Sources report that he slipped in to a spiral of isolation and paranoia. Can it be true that in the final days of the firm’s life he employed bodyguards to patrol outside his office? Was Fuld (often nicknamed the Gorilla for his brusque conversational manner) worried in case an aggrieved colleague, enraged by the shrivelling share price, tried to stab him with a paper knife or bludgeon him with a BlackBerry charger?
I heard from several sources that Fuld was unrealistic about the value of the business and was thus always at a disadvantage in any negotiation. I was the first journalist to point out the relative weakness of Lehman’s board of directors. Lehman’s collapse and the strategic mistakes that led to this – piling on real estate assets at the peak of the market – raise the important issue once again of appropriate board composition.
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| Dick Fuld slipped into a spiral of isolation and paranoia. Can it be true that in the final days of the firm’s life he employed bodyguards to patrol outside his office? |
"Fuld wouldn’t listen to anyone and then, when he started listening, he listened to the wrong people," a mole hissed. The same is true of Jimmy Cayne, the former chairman and chief executive of Bear Stearns. I hear that Cayne’s office was a sort of bunker painted in black. "I felt I was visiting Dr Death," a source grimaced. Both Fuld and Cayne probably had $1 billion in company stock. Did this influence them in the wrong way? It’s heart-breaking to sell something for 50 cents when three months ago it was worth one dollar. But the best traders know when to cut their losses and sometimes paper profits are just that – ephemeral.
So Barclays’ president, Bob Diamond, ignored my advice and decided to expand aggressively in the US by pouncing on a limb of the Lehman carcass: the US broker-dealer. I called a senior banker, Barry, on Monday 15 September as AIG was sinking in true Titanic style. "What are you doing?" I asked. "Watching the world implode," Barry sighed before spluttering: "And as for Mr Diamond, I’ve now decided that he just wants to be in the same room as Hank Paulson. How can he even think about buying Lehman on a day like this?"
However, increasingly Barry is in the minority. "Smart move," another source cooed. "The Lehman New York building alone has to be worth $1 billion and so he’s paying very limited goodwill for a US platform which gives him the option to expand into equities internationally if he wants." An insider commented: "Diamond has always been clear that his goal was a bigger footprint in the US. The Lehman move gives him overnight access to a bulge-bracket franchise that it would have taken years to build."
Few of us are able to swim against the tide and make big bets when visibility is severely limited but Diamond has always had a touch of the visionary about him.
Nomura purchased the European and Asian investment banking and equities operations of Lehman Brothers. I am perplexed as to why Nomura has agreed to guarantee employees the equivalent of last year’s bonus pool. Some $1 billion has been set aside for this and certain top bankers will receive cash payments if they stay until the autumn of 2009. So as the investment banking model dissolves, Nomura has locked lucky Lehman staff in to payments paid at the peak of the market. I have only one word for this: ridiculous.
However, it is unlikely that one of my favourite Lehman bankers, Jeremy Isaacs, will be joining his former colleagues at Nomura. Isaacs, who is very talented, was previously chief executive of Lehman in Asia and Europe but resigned a week before the firm went bankrupt. I am sure Jeremy will not be short of interesting offers, so watch this space. The demise of Lehman was marked by intense hostility between the US and international employees. Apparently, when hardship comes knocking, globalization as well as fraternity goes out the window. "It’s a disgrace," a European mole barked. "Nobody has heard from New York since the bankruptcy."
Many top bankers tell me they have never witnessed such difficult times. It was therefore intriguing to learn that in early October a group of wise old men will gather at White’s private members’ club in London’s prime St James’s Street. Banking legends such as Bob Genillard, Stanley Yassukovich, Ossie Grubel, Sir John Craven and John Stancliffe will attend a dinner to honour the 30-year anniversary of the disappearance of investment banking firm Credit Suisse White Weld. White, Weld and Co was a classy New York investment bank that formed an alliance with Credit Suisse in the 1960s. In 1978, White Weld was purchased by Merrill Lynch and the partnership with Credit Suisse dissolved. Credit Suisse then linked up with the investment bank First Boston. Investment banking, now as then, is an industry that evolves in order to survive.
Talking of White, Weld, a great-uncle of president George W Bush, George Herbert Walker Jr, worked for the firm. Another scion of the Walker/Bush clan, also George Walker, is one of the great survivors of the Lehman debacle. He has been appointed chief executive of the supposed jewel in the Lehman’s old crown. Neuberger Berman has been bought for a $2 billion song by Bain Capital and Hellman & Friedman. Walker and the management team get a significant stake.
Anyway, back to W. "Aaahh," a mole grimaced. "All this is so beyond him that whenever I see him striding across the lawn to reassure the nation, I long for him to turn tail and disappear back into the White House." Mole has a point. But I am a fervent believer that even in the bad times you have to retain a sense of humour. And I am reminded of a former president (from Texas as well) who also made an unwelcome appearance. After a sumptuous dinner at the White House, a female guest was slumbering alone in her allocated bedroom when the door opened and in sidled a naked Lyndon B Johnson. "Move over honey," hissed Johnson. "It’s your president calling."
How was your month? Please send news and views to abigail@euromoney.com.