Hohn is the founding partner of The Children’s Investment Fund (TCI), an activist hedge fund, which took on and squashed Werner Seifert, Deutsche Börse’s chief executive, in 2005.
Last week, in an open letter to AC Martinez and Rijkman Groenink, chairman and chief executive of ABN Amro respectively, TCI argued: “We believe that it would be in the best interests of all shareholders, other stakeholders and ABN Amro for the managing board of ABN Amro to actively pursue the potential break up, spin-off, sale or merger of its various businesses (or as a whole).” Shares in the Dutch bank rose to a six-year high. I am reminded of the opening verse of Shakespeare’s Twelfth Night:
If music be the food of love, play on;
Give me excess of it, that, surfeiting,
The appetite may sicken and so die.
STBs
And market participants seem to have had a surfeit of second–tier banks (STBs), especially when it comes to their investment banking aspirations. “What is the point of the Dresdners and Commerzs of this world?” a source grumbled recently. That is a little unfair to Klaus-Peter Müller, Commerzbank’s chairman, who gave the German laggard an adrenalin injection in 2005 by acquiring Eurohypo (see March’s Euromoney). But dullards like ING and Lloyds TSB? “It’s a joke, Lloyds trying to reinvent themselves as a bond house,” source snarled. Last November Lloyds hired Farouk Ramzan from Société Générale to head debt capital markets. In 2006, Lloyds was ranked by Dealogic as the 40-something international bond lead-manager.
In a way, it’s paradoxical. The markets are booming and thus it should be a great time to build a financial business. Look at the growth of hedge funds and private equity firms in the last few years. But STBs stand impotently on the sidelines. I assume it is because they are not prepared to pay the price. The going-rate for today’s key players would make any sane chief executive splutter. And it’s difficult to know who to trust. Many mercenaries see an STB as an SRT – splendid retirement trade. Look at HSBC. It hired John Studzinski from Morgan Stanley to co-head the investment bank with Stuart Gulliver only to discover that homegrown talent works best.
Of course, 10 years ago Barclays was dubbed a second-tier bank. And most analysts assumed it would be gobbled up in the consolidation of the European financial industry that was to be precipitated by monetary union. That consolidation never happened and Barclays has undergone its own transformation. Last year’s pre-tax profits increased by 35% to £7,136 million ($14,024mln), more than double pre-tax profits of 2000. The investment banking operation, Barclays Capital, reports pre-tax profits of £2,216 million.
But what annoys me about Barclays’ results is the enormous impairment charges they are taking in their Barclaycard and UK unsecured retail loans businesses. Impairment charges for 2006 were £2,154 million, up some 40% on the previous year. That is a great deal of money blown on incompetent lending. In fact, these bad debt provisions are equivalent to virtually all of Barclays Capital’s 2006 profits.
Foxy lady
And I saw it coming. Devoted readers will know that I own an exquisite one-bedroom flat in Notting Hill Gate. In 2004, I rented the flat to a self-employed accountant. Let’s call her Roxy. After the first month, it became obvious that Roxy was having difficulty paying her rent. I had to evict her – which I was fortunate enough to do swiftly. Roxy left but she failed to have her post redirected. In vengeful mood, I opened her letters to discover that the feckless creature owed money to every credit card company in town, including Barclaycard. She was not even repaying the minimum balance on her cards. As the letters became more vehement (including one from the Inland Revenue), I took to calling a few of the lenders. “You will never get your money back from this woman,” I warned. “She’s no longer here and she didn’t leave a forwarding address.”
How can a woman like Roxy get so much credit? And, there are obviously a lot of Roxys out there. Many of them seem to have been Barclaycard customers. Why do the UK banks find it so difficult to qualify their retail customers? And because, unlike me, whoever makes these decisions is not risking their own money, there is little incentive to stamp on the problem promptly. All in all, a cautionary tale for our era. What do you think?
I return to a theme I have discussed before: the ever-widening chasm between the Haves and the Have-nots. The media glamorises the excesses of the rich and this provokes envy in the hearts of the Have-nots. They crave the lifestyle of the Haves, and quixotic lending encourages this craving. Roxy saw my beautiful flat and wanted it. She didn’t think: “How am I going to pay for it?” Rent is one expense that can’t be dumped on a credit card.
In January, I predicted that a ‘soak the rich’ mentality would soon reappear. And I am not alone in thinking this way. Dashing Damon Buffini, head of Permira, Europe’s biggest private equity firm, was galvanised by a camel last year to start a charm offensive. And last Tuesday Barclays’ chief executive, John Varley, was in apologetic mood when interviewed on Radio Four about the bank’s results. “Why is he so sheepish about making profits?” a colleague fulminated. “Someone should explain that’s what banks are meant to do.”
Can bank CEOs hit their targets?
My editor has asked me to write about football. Football, of all things. But there is method in his madness. Following on from Euromoney’s February cover story on the Champions League of investment banking, the wizards of the magazine’s IT department have invented an online game where you can choose your CEO and try and volley 10 balls into the back of the net (whatever that means).
While your CEO is trying to score, other bank CEOs will try and put you off with what I am reliably informed are “terrace chants adapted for the banking market”. Apparently it’s quite addictive. And Euromoney is keeping a league table of which banks accumulate the highest scores, so it’s your corporate duty to play it.
While there are caricatures of bank CEOs aplenty, it does (to my mind at least) lack a depiction of who the February story named as the “leading WAG in investment banking”, Dijana Jenkins. You’ll need to check out my column in the March edition of Euromoney for that.
Next week: the column takes a Spring break and will be back on Thursday 15 March.
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