It is eight months since Nomura plucked the European and Asian limbs from the Lehman Brothers carcass. Nomura increased its headcount by some 8,000 people in a period when most banks were firing not hiring. The man in charge of Nomura in Europe, the Middle East and Africa is 55-year-old Sadeq Sayeed, who was formerly a special adviser to Nomura’s executive committee. Sayeed has also worked at CSFB and has undergraduate and master’s degrees from MIT. In a press interview last December, Sayeed claimed that the integration was going well: "It’s like going out to dinner and expecting a fantastic meal and it turns out to be Gordon Ramsay. It exceeds even what you expected it to be." Sayeed is obviously not a fool but I hear rumblings that the path to Nomura nirvana may be rocky. A canny commentator whispered: "It’s the tale of the haves and the have-nots."
It is widely known that Nomura gave two-year guarantees, equivalent to 2007 compensation levels, to many of Lehman’s staff. In other words, lucky Lehman lovelies locked in to peak numbers last autumn, at the absolute trough of the investment banking market. I hear sums such as $15 million for a co-head of a European division and a range of $2.5 million to $10 million for senior coverage bankers. Lehman staff have also won most of the key front-office jobs in Europe. For example Barry Nix, Nomura’s formerly powerful European co-head of global markets, lost out to the Lehman infiltrators.
Commentators worry that with such high fixed costs, Nomura will find it hard to achieve profitability. Indeed results for the year ending March 2009 showed a ¥708 billion ($7.2 billion) loss, and compensation costs for the fourth quarter more than doubled from a year earlier to ¥161.7 billion, reflecting Lehman staff costs. Mr Sayeed is on record as stating that he hopes his business will break even by 2010. Barclays, which purchased the US broker/deal operations of Lehman, has fared better. In its first quarter 2009 interim management statement, Barclays wrote: "The acquisition and successful integration of the Lehman business resulted in a transformational change in Barclays Capital where profit before tax was very substantially ahead of last year, rising 361% to £907 million." A source said: "Barclays bought the essence of Lehman – its US franchise. Nomura bought the rest."
Source may be a little cynical, because I recall that in 2007 over half of Lehman’s revenues derived from the international operations. So obviously there were some robust business lines outside the US. However, an insider explains that much of the international pitch to clients was based on the allure of Lehman’s US distribution. This no longer exists. A senior banker at another firm told me: "To be in the top league, Nomura will need to add a critical-mass US operation. It’s not clear how they achieve that without being a forced buyer." Another issue is that, as a securities firm, Nomura does not have the balance sheet to compete with major commercial banks. At the moment, most banks are capital-constrained, wary of potential future write-downs and thus cautious about making large capital commitments, even to big clients. But this risk aversion might change over the next 18 months and Nomura will then be at a disadvantage.
Sources murmur that results so far are mixed. Asian cross-border M&A work as well as the associated capital-raising is faring well. In fact, Nomura was ranked first in the first quarter 2009 league table for cross-border Asia (ex-Japan) M&A. But in Europe, despite heavyweight investment bankers such as Christian Meissner and William Vereker, deal-flow is patchy. According to Dealogic, the firm ranks number 16 in the 2009 year-to-date, announced European M&A league table. And in fixed income, Nomura has not won a single public European corporate mandate denominated in dollars, euros or yen. This dearth of deals is gruesome news given that the corporate bond market has been the sweet spot for bank revenues in early 2009. A disgruntled Nomura mole mutters: "I hear an awful lot of talk from Lehman bankers about whether we have the ability to execute leveraged and structured finance deals. They don’t seem to realize that those products may never come back." A more positive former Lehman banker said: "Good money is being made in equities and fixed income but European M&A is more difficult. It will take time to sell the new Nomura brand and build relationships."
A Nomura insider pointed out that the firm ranks as the eighth-largest trader for UK equities on the London Stock Exchange and is a corporate broker to four FTSE 100 clients. "We see ourselves as a winner in the downturn. We have not taken government money, we acted decisively to execute a major deal and the Lehman Brothers integration has gone well. We are extraordinarily well positioned to take advantage of cross-border opportunities between Asia and Europe on behalf of our clients."
I agree that a powerful Asian presence will be important in the future. However, it is conceivable that the Lehman acquisition might turn out to be an expensive mistake for the Japanese. Nomura faces hurdles in its battle to build a global investment banking presence – a high cost base, a limited balance sheet and a lacuna for US distribution. Maybe Nomura is not aiming for global domination and will be content with a more niche approach. I look forward to meeting Sayeed and hearing his views. Indeed, the Japanese tend to take the long view, so with patience the house that Dick demolished can be rebuilt. But I always worry when loyalty is purchased with hefty financial guarantees. What do you think?
In the past two years, we have witnessed the unthinkable and we have seen accepted platitudes pulverized. Remember the mantra of decoupling? Remember the truism that house prices would always rise? Do you also recall how keen banks were to purchase asset management companies on the grounds that these divisions would prove a counter-cyclical source of stable earnings? The past year has shown how hard it is to make money in asset management unless you are one of an inner circle of very large asset gatherers. The growth businesses are exchange-traded funds and alternative assets, everything in between is pedestrian. Credit Suisse recognized this when it sold part of its traditional asset management business to Aberdeen Asset Management last December. The astute Jean-Pierre Mustier, head of the investment management and services division at Société Générale, has done something similar. He sold the London-based asset management subsidiary to the hedge fund group GLG, and in January 2009 Crédit Agricole and Société Générale signed a preliminary agreement to combine their asset management operations. The combined entity will have €638 billion of assets under management (as of September 30 2008) and will be the fourth-largest asset manager in Europe and the ninth largest on a global basis. This trend is an interesting backdrop to the potential sale by Barclays of its world-class BGI asset management operation. It is not clear to me why strategically if you own a market leader you would want to sell it. Although a source told me: "Barclays may feel they have taken this business as far as they can under the Barclays umbrella." BlackRock and Bank of New York Mellon are tipped as potential purchasers of BGI. My instinct is that Larry Fink, the canny chief executive of BlackRock, might make off with the prize. Fink and Bob Diamond, the president of Barclays, know each other as they are both members of the powerful Credit Suisse alumni network.
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And talking of BlackRock, Bank of America owns a 49% stake in the company. This BlackRock booty fell into Bank of America’s lap because of the Merrill acquisition. I am starting to soften my stance towards Ken Lewis, Bank of America’s chief executive. Ken has turned out to be the world’s best street-fighter and during the last six months he has had a lot of blows to dodge. In April, Ken was stripped of his chairman title. I watched several television interviews with Lewis following the stress test results. I was impressed by his patient fielding of numerous, unnecessary questions about his future as chief executive. And Ken’s soft southern accent is beyond charming. But underneath the polite demeanour lurks a spine of steel. Can it be true, as a mole murmurs, that when the Wall Street CEOs met President Obama this spring, only Ken had the courage to insist defiantly that he did not want to be "Geithner’s poodle". I am speechless with admiration. Politically incorrect chief executives are such a rarity these days.
This month, we celebrate the 40th anniversary of Euromoney. Undoubtedly, the past two years have witnessed the biggest crisis in financial markets since Euromoney was founded. In my 25-year career as a banker and financial commentator, I cannot remember a period when big banks refused to lend to each other. And obviously, we have never seen two US investment banks fail in one year as happened in 2008. Do you remember the phrase "the bulge bracket"? It referred to the oligopoly of Wall Street’s finest broker-dealers. The bulge bracket collapsed last autumn. Even Goldman Sachs employees wince as they remember the weekend of September 13 when Lehman failed. "It felt as if the waves were lapping at our feet," a partner mused. "And not in a good sense."
During the past two years, the financial services industry has contracted dramatically. Whole departments have been felled and others – such as the equity IPO business – lie fallow. A top management consultant estimates that some 130,00 financial services jobs have been lost globally. It is not only the cannon fodder that has been hard hit, the landscape is littered with the ghosts of senior financiers. "Many experienced bankers are sitting on the bench," a mole mused. "I wonder if they will be given the chance to serve once more?"
We love scapegoats. Many senior bankers walked the plank; others such as Greg Fleming, former co-president of Merrill Lynch, or Michael Klein, co-head of Citi’s investment bank, left voluntarily. The list is long and I will be selective. At Merrill, the refugees include two chief executives, Stan O’Neal and John Thain, as well as senior bankers such as Ahmass Fakahany, Rosemary Berkery and Nelson Chai. Morgan Stanley lost Zoe Cruz, Jonathan Chenevix-Trench and Neal Shear. The roll call of UBS’s dearly departed is plump and includes two chairmen (Marcel Ospel and Peter Kurer) as well as two chief executives (Peter Wuffli and Marcel Rohner) and several heads of the investment bank (Huw Jenkins and Jerker Johansson). At bankrupt Lehman, Dick Fuld, Joe Gregory and Bart McDade are on the bench. Bear Stearns was absorbed by JPMorgan but Jimmy Cayne, Warren Spector and Alan Schwartz were cast aside. And at Citi, the old guard – Chuck Prince, Sallie Krawcheck, Tom Maheras and Randy Barker – are no longer guarding the citadel. The UK banking landscape is a battlefield littered with bodies. At RBS, Sir Tom McKillop, Sir Fred Goodwin and Johnny Cameron have gone. At HBOS, the chairman and chief executive have left. Lloyds is about to lose its chairman, Sir Victor Blank, architect of one of the worst mergers of the decade if not the century. In France, the chairman of Société Générale, Daniel Bouton, tainted by the Kerviel fraud, resigned in May 2009.
So as commentators sing of green shoots, might it be appropriate to use the "R" word ("R" as in rehabilitation) for our fallen angels? There is no general rule. I think it is likely that Greg Fleming, Sallie Krawcheck, Michael Klein and Alan Schwartz might re-emerge with senior roles in the mainstream. But others more closely associated with the trading losses might discover there are no second chances for sinners. The problem is perception. A top Wall Street banker ruminated: "John Thain is an intelligent, effective leader but after the office-refurbishment scandal and the cantankerous public quibbling with Ken Lewis, he is perceived as a greedy, shrill liability."
For the tarnished chief executives, non-executive board positions might be on offer: Chuck Prince is on the board of Johnson & Johnson. Another option is to join or found a boutique or hedge fund: Dick Fuld is rumoured to be joining the hedge fund Matrix Advisors. But that Fortune 500 CEO corner office might prove elusive. The whole industry has contracted. There are fewer jobs to go around and that applies to both chiefs and Indians. An observer comments: "Some of these guys want to do something less full-on after years of 24/7. Others are in denial and still waiting for the next big job."
We have been here before. I smiled wryly when I read a recent interview in the Financial Times with Jean-Marie Messier, the former chief executive of Vivendi Universal. "From one day to the next, a full diary, filled with meetings, contacts, trips, honours, work, friends, false friends, suddenly reduced to nothing. Just emptiness," he remembers. Messier was crushed by the way he had been abandoned by his former courtiers and lynched by the media. In 2002, it was the TMT bubble that burst. In 2008, it was the excesses of finance that were exposed. And, of course, tulip mania will happen again.
Busted bull market bankers might find the future a lot leaner than the past. Most of them have been amply compensated for many years, so are not worried about a shrivelling bank account. Nevertheless, if the lawsuits become serious, wealth will quickly wither. Lawyers are a luxury that few of us can afford. The future will reveal whether any members of the bench have the character to turn a difficult situation around. Salvation can be achieved, as former fallen angels Mike Milken and Ted Kennedy know. But it takes years to resuscitate a reputation and reinvent a career.
It is so important to have a good wilderness. The Abigail with attitude column therefore offers a guide to decoding the underemployed senior banker’s vocabulary. Please note the word unemployed only applies to little people.
"I’m a bit of an éminence grise at XYZ company."
"I’m giving something back." Senior banker waxes lyrical about the obscure charitable enterprise he is patronizing and how rewarding it is spiritually. In fact, real life is depressing and dull. There is no first-class travel and it’s minicabs, rather than limousines, all the way to gritty northern towns where senior banker tries to engage with murderous hoodies who are both unemployable and ungrateful. Tastefully furnished boardrooms are replaced by grubby community meeting areas that smell of Dettol not roses.
"I’m mentoring some wonderful young people." This is a blatant euphemism for lunching with gorgeous, leggy, 20-something girls and gazing into their eyes while shamelessly name-dropping all the senior people you know who might be able to help them. You have no intention of making any introductions in case word leaks out to your wife who is already fed up with you loafing round the house moaning about your misfortune. Frankly, an expensive divorce is the last thing you need right now.
"I’m thinking about doing something entrepreneurial." Unless senior banker immediately fishes out a 100-page business plan tightly packed with financial projections and market penetration pie-charts, treat this phrase with the scepticism it deserves. A well-know euphemism for: "I’m working on my golf handicap and drinking more than is good for me." It’s highly unlikely that someone who has spent two decades in a regimented financial institution has an entrepreneurial bone in their body.
"I’m running a family office." Senior banker is managing his own money with mediocre results.
Some words of advice from the Abigail with attitude column: writing a book is so last year, (apparently a tombstone from former US treasury secretary Hank Paulson is on its way). Dub yourself a poet instead. Everyone understands it takes years to craft a slim volume of self-indulgent sonnets. Also doing something in the arts is absolutely out. It sends an elitist message. Remember we are all socialists now. The cool crowd serve in soup kitchens and hope that potential photo opportunities will show that they too, like first lady Michelle, have tautly toned biceps. Didn’t you know that repetitive ladling is wonderful exercise?
And finally, riddles of the month. Which chief executive was described to me as "an invader of personal space"? Which big bank has three senior officers who compete with each other to be first in the office gym each morning? Which disgraced Wall Street chief executive was spotted lunching in a mid-town New York eatery with a handsome former colleague? This of course prompts the important question: where does one go to break bread with a disgraced CEO? Premises must be appropriately deserted, adorned with dim lighting and have back doors for a stealthy yet swift exit. Please send news and views to abigail@euromoney.com.