I am reminded of the Greenspan era when policymakers fuelled one bubble after another. By cutting interest rates so savagely, central banks have created a liquidity lunacy that will end badly. Let’s hope we’re not the susceptible fools left holding the parcel when the music stops. It’s important to recognize when things are too good to be true. Once you start to feel an overweening confidence mingled with complacency, sell everything and run for the hills. During the first half of 2007, most financial commentators insisted that London was about to replace New York as the pre-eminent global financial centre. I never agreed with this view. Three years later, London is grey and grim, New York is still the momentum metropolis and everyone is talking about Hong Kong as the new, key financial hub.
Lackluster LSE
The London Stock Exchange is a symbol of this decline. When London was the purported financial centre of choice, foreign exchanges were lining up to purchase the LSE. Deutsche Börse, Euronext and Nasdaq all came calling. But chief executive Clara Furse kept insisting that the suitors were undervaluing her precious jewel. Furse cobbled together a deal with Borsa Italiana and several Arab shareholders in 2007. Although I am normally very supportive of senior women in finance, I am not a fan of Furse. She did a mediocre long-term job for investors and, like many others caught up in their own press-relations bubble, failed to sell at the top. Furse received a damehood and shareholders shuddered as the share price shrivelled. Furse handed over to former Lehman banker Xavier Rolet in mid-2009. She now drifts around in the ether as a highly regarded non-executive director although as far as I am concerned she has limited vision. I noted that in June 2008, Furse bought more than 30,000 London Stock Exchange shares. While insiders generally have a poor track record of share dealing, Furse’s purchase, just before the wheels fell off the financial wagon, looks particularly inept.
Xavier Rolet faces a tricky task sorting out Furse’s legacy. The exchange has inadequate technology, evidenced by the breakdown of its systems in late November, and faces fierce competition from upstart multilateral trading facilities such as Chi-X, Turquoise and BATS Europe. I hear good things about Rolet. I look forward to meeting him and hearing about his plans for the future.
RBS's rocky road
Another symbol of London’s former financial glory is Royal Bank of Scotland. RBS used to be run by the arrogant and swashbuckling Sir Fred Goodwin. Come to think of it, the UK has a poor record of proffering titles to financial titans who then turn out to be tarnished dwarfs. I am worried about RBS, which is now 84% owned by the state and run by former Credit Suisse banker Stephen Hester. The global banking and markets division, which in 2007 accounted for some 35% of the bank’s profits, could experience a staff exodus. Indeed, there has been a trickle of resignations before bonuses have even been announced. Hester has talked about the bank walking a tightrope as it attempts to retain and hire bankers under government ownership. I understand that senior management is keen to pay key people competitively in order to protect the value of the taxpayers’ investment. A source talks about, "drawing on every sinew of trust with employees".
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I recently met John Hourican, head of RBS’s markets-focused investment bank. I like Hourican immensely. He is unpretentious, straight-talking and has a good sense of humour. Hourican has a reputation for being a king of detail. It does not surprise me therefore that he qualified as an accountant. "I’m forensic about what I don’t know," he told me with a chuckle. Chief executive Hester and his new team need to transform RBS from a highly leveraged acquisition machine to a bank that focuses on organic growth. However, RBS will continue to have a global orientation. The investment bank is represented in 39 countries and RBS has a significant US retail and commercial presence following the acquisition of Citizens which, as of June 30 2009, was the ninth-largest US bank by branches. Everything I hear about Stephen Hester makes me think that he is a steely soul who might be able to sort out the RBS mess. However, the road ahead will be rocky and Hester will need good henchmen like Hourican at his side. At the moment, the institution resembles a punchbag for Neelie Kroes, the outgoing European Union competition commissioner, and Alistair Darling, the British chancellor of the exchequer, to hit when they are having a bad day. It would be more constructive to organize a public flogging of culpable Fred Goodwin, together with close adviser Matthew Greenburgh of Merrill Lynch, and let the new management run RBS without meddling from ignorant politicians.
Who's who at UBS
I have always believed it is better to be lucky than smart. Rob Jolliffe used to be the global head of debt capital markets at RBS. He left in December 2007, citing personal reasons. Perhaps Rob realized that the acquisition of ABN Amro was the Trojan Horse that would topple the Scottish empire. Jolliffe has now resurfaced at Swiss bank UBS. I have not written about UBS in detail since the firm persuaded Oswald Grübel, the former head of Credit Suisse, to quit the golf course and return to the turbulent seas of high finance. I never had any doubts that Ossi would succeed in turning the tide. And in the 10 months that he has been in charge, Grübel has achieved a lot: stabilizing and de-risking the business. The bank reported an operating profit for both the second and third quarters of 2009. Capital ratios and morale have improved: the firm is able to attract good staff once again. Indeed, rumours won’t go away that Bill Winters, ex co-head of investment banking, is considering a senior role at UBS.
I am intrigued by recent developments in the fixed-income area of the investment bank. The investment bank is run by Alex Wilmot-Sitwell and Carsten Kengeter. Alex is a highly respected former Warburg corporate financier. Carsten was hired from Goldman Sachs in late 2008 to run fixed income. Carsten has Jeff Mayer, ex-Bear Stearns, as his co-head for fixed income. UBS hired a lot of people in 2009 in fixed income, including Rajeev Misra as head of credit. Rajeev was formerly a close associate of Anshu Jain, co-head of Deutsche’s investment bank. Rajeev is apparently doing well at UBS and might take over from Carsten as global head of fixed income.
Matthew Koder is head of global capital markets. This job includes equity and debt capital markets. Rob Jolliffe, who worked with Kengeter at Goldman Sachs, is now UBS’s global head of debt capital markets, based in London. Jolliffe’s co-head, Michael Davidson, is in New York. David Soanes, a well-known financial institutions specialist, becomes deputy global head of capital markets. On the surface, there are a lot of chiefs crowding around Carsten with overlapping roles. I will watch with interest to see how things shake out in fixed income. This was where all UBS’s problems began. However, have you noticed that no one talks about the sale of UBS’s investment bank any more? Perhaps the problem child is less problematic.
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Another newcomer to watch at UBS is Bob McCann, who pirouettes in to run the wealth management business in the Americas. UBS’s wealth management franchise has suffered in the past two years. During the first nine months of 2009, some SFr56 billion ($55 billion) of client assets flowed out of the wealth management business as the US authorities savaged the Swiss bank for tax avoidance. UBS without a successful wealth management division is like apple pie without cream. It doesn’t work. But the business is not bust. One forgets the impressive scale of UBS’s wealth management franchise. At the end of the third quarter of 2009 the firm had some SFr1.7 trillion of assets under management in its wealth management division. That is approximately double the assets under management at rival Credit Suisse’s private bank. I expect McCann, formerly of Merrill Lynch, to embark on a hiring spree as he targets former Merrill colleagues. This will make life more difficult for new kid on the block Sallie Krawcheck, who was hired in 2009 to head Bank of America Merrill Lynch’s wealth management franchise. Krawcheck can’t afford to lose staff and McCann can’t afford not to hire staff. Take your seats for an interesting battle.
Morgan Stanley – the new Merrill Lynch?
Ironically, I am starting to think that Morgan Stanley will reinvent itself as the new Merrill Lynch. In other words, Stanley will become a powerful retail brokerage firm with an institutional securities business attached. The charming and clever James Gorman, who at one stage ran Merrill’s global private-client business, took over as Morgan Stanley’s chief executive in January 2010. In my October 2009 column, I congratulated Gorman on his new role (announced the previous month) and proffered some unsolicited words of wisdom: "My advice to James: ‘Hire rapidly and bring in people especially on the trading side who are loyal to you.’"
Gorman has his foot on the accelerator. He achieved more before taking the helm than most chiefs manage in their first hundred days of office. On December 8, Gorman announced a new senior management line-up. The ferociously bright former CFO Colm Kelleher was appointed co-president of the institutional securities business with Paul Taubman, the previous head of investment banking. Colm will oversee the sales and trading business – a tough challenge as Morgan Stanley has performed badly in this area for the past few years and Taubman will focus on investment banking. I am delighted that Walid Chammah, for whom I have great respect, remains as chairman and chief executive of Morgan Stanley International.
Ruth Porat, head of the financial institutions advisory group, was named chief financial officer. I am keen to see more senior women at the top of financial firms and Morgan Stanley did itself a great disservice when it parted company with its former head of institutional securities and co-president, Zoe Cruz.
In mid-December, an interesting announcement crossed the screen. Greg Fleming, the talented and engaging former president of Merrill Lynch, will join Morgan Stanley in February as president of Morgan Stanley Investment Management. He will be responsible for Morgan Stanley’s asset management, private equity and real estate businesses as well as global research. This is a tough portfolio but Greg has the ability to fix the problems. Indeed some are already speculating that he might be destined for greater things at Morgan Stanley. Fleming is best known for his skills as an investment banker working with financial institutions. He was also involved in merging Merrill’s investment management business with BlackRock in 2006 and sat on the BlackRock board until he left Merrill in early 2009.
Morgan Stanley did not have a good crisis: I attribute this to John Mack’s overly authoritarian leadership style and his ambiguous attitude to risk. Mack ramped up risk at the wrong time and scaled risk back when in fact it was safe to re-enter the water. Despite this, Mack commands great loyalty among senior bankers at the firm. The trading side of the business may have faltered but the advisory franchise is intact. Indeed at the time of writing, Morgan Stanley is ranked number one in the announced global M&A league table by Thomson Reuters.
I am positive about Morgan Stanley under Gorman. The fact that Gorman has moved so quickly to put in place an excellent senior management team shows that he is aware of the need to fix things. A well-placed insider, commenting on the new top line-up, said insightfully: "Long chess game, good opening." I will follow developments at Morgan Stanley with interest, especially their fourth-quarter profits, which should be announced later this month.
2009...
Last year was dominated by the demise of Lehman Brothers. I have written in previous columns about Nomura and Barclays, which effectively carved up the Lehman carcass between themselves. However, one senior banker chose not to follow the crowd. In early 2009, Jeremy Isaacs, the former chief executive of Lehman in Asia and Europe, set up the JRJ Group, an investment firm, with former colleague Roger Nagioff. It was recently announced that JRJ would acquire a majority stake in Marex, a European futures broker providing specialist trading services for commodity and financial markets. The transaction is expected to close soon and I suspect that we will hear much more about JRJ in the next few years. Most investment bankers love to say that they are entrepreneurs at heart. That is rarely true: most bankers can only operate in the cocooned confines of a big financial institution. Faced with certain smug financiers, I find myself biting my tongue to avoid spitting: "It’s not you, it’s the seat, stupid." Isaacs is different, as this transaction proves.
2010 – and beyond
Recently, people have been asking me where the stars of the future are and who they are. This question might be prompted by the fact that there seems to be a paucity of talent at the senior levels in banking and many of those at the top have proved ill-equipped to cope with the difficulties of the past two years. Even Lloyd Blankfein, chief executive of Goldman, has handled the backlash against bankers badly. Perhaps even worse, Blankfein didn’t seem to see the problem coming. Bank of America’s desperate quest for a new chief executive would be funny if it weren’t so shocking. So where are the Gormans and the Isaacs of the future lurking? Where are the relatively junior bankers who today are running teams but who have the ability to lead divisions and even firms? Please send your ideas to abigail@abihofman.com and over the next few months I will name names.