Abigail Hofman: Heroes and villains of 2008

Later in the speech Pandit claims: "We have spent the last year ‘getting fit’... and are in a strong competitive position... We will be the long-term winner in this industry." There then follows a homily on banking that would make even a five-year old child cringe: "As I said, we are a bank. What does a bank do? A bank takes deposits and puts them to work..." And Citi’s chief concluded with a flourish: "Let’s show the world what we can do!" One week later, Citi was effectively bailed out by the US Treasury after a 70% drop in its share price during the month of November. Perhaps "cocoon of senior management denial" was an understatement.

Of course, Pandit did not join Citi until April 2007, so he cannot be held responsible for all of the bank’s woes. Most of the murky sub-prime mortgage assets and leveraged loans were accumulated under his predecessor, Chuck Prince, and co-head of investment banking Tom Maheras. To date, Citi has taken more than $60 billion of write-downs and credit losses across its businesses.

Another man who had a senior role at Citi for many years was Robert Rubin, president Bill Clinton’s Treasury secretary. Rubin joined Citi in 1999 as a director and chairman of the executive committee of the board. He is now what is described as a senior counsellor. As Citi was lurching towards meltdown during the weekend November 21, the New York Times published an article entitled: "Citigroup saw no red flags even as it made bolder bets". The article was critical of Rubin, stating that both he and Prince had "played pivotal roles in the bank’s current woes by drafting and blessing a strategy that involved taking greater trading risks to expand its business and reap higher profits".

A few days later I was amused to read a letter to the editor of the New York Times from Lewis B Kaden. Kaden, who until then I had never heard of, is a vice-chairman of Citi and has an impressive curriculum vitae. Devoted readers will know that I despise the vice-chairman title, which is normally handed to those who have no power or management responsibility in an organization. Kaden wrote that "[Rubin] was never an ‘architect’ nor was he a drafter of Citigroup’s risk-taking plans and had no operating role". Kaden continues: "Based on my experience, Bob has been an advocate for expanding business opportunities premised on four conditions: careful risk reward judgements, having the right people in place, having the right technology in place and appropriate oversight."

I could have come up with those criteria. Citi paid Rubin tens of millions of dollars during the past decade. Surely the firm was entitled to more detailed and insightful advice on such an important topic? I remain intrigued as to the authorship of the letter. Given that Rubin was being savaged, why did he not respond himself or ask Citi’s chairman, Sir Win Bischoff, or chief executive Pandit to spring to his defence? One of life’s little mysteries, I guess. What do you think?

Those of us involved in finance tend to treat the vagaries of investment banking as a matter of life and death. But sometimes an event happens that makes market meltdown seem insignificant. In late November 2008, terrorists attacked various high-profile targets in Mumbai, including the famous Trident-Oberoi hotel complex. Nearly 200 people were killed and hundreds more injured.

I discovered to my consternation that my first City boss, Kevan Watts, was caught up in the atrocities. Watts, a former co-head of global investment banking at Merrill Lynch, is now president of DSP Merrill Lynch in India. Watts is one of those understated Englishmen blessed with a first-class mind, a strong sense of irony and sack-fulls of sangfroid. Think: a grey haired James Bond turns his hand to investment banking. Kevan walked through the Oberoi hotel lobby 10 minutes before the terrorists attacked it and went to his room to join a conference call. "Once I heard the explosions, I realized what was happening," he told me. "I barricaded myself in my room using a sofa, turned the lights down low and the air conditioning up high in case we lost power and charged my Blackberry. I was there for 26 hours. I had a small pack of digestive biscuits which I decided to ration and when I was released I still had six digestives left.’

"But Kevan," I spluttered, "weren’t you terrified you would be killed?" Watts was phlegmatic. "Not really," he said. "After the first few hours, I assumed that I would be OK. Of course the risks were a lot higher than a normal day in the office! But I had a constant flow of Blackberry and SMS messages. Many survivors had far worse experiences and so many families lost loved ones for ever." And you thought "grace under pressure" was a phrase someone coined to describe dealing with office politics?

Finally, as 2008 hobbles out, I ponder who were the heroes and villains of those terrible 12 months. My nominations are listed in no particular order as it is sometimes difficult to distinguish within the ranks of deities and demons, which is why some luminaries appear in both lists.

The heroes

– Oppenheimer equity analyst Meredith Whitney for telling bankers what they didn’t want to hear and investors what they needed to know.

– Merrill Lynch president Greg Fleming for spotting that time was up for investment banking and Merrill Lynch. Fleming spent the weekend of September 12 immersed in frenetic negotiations. A deal with Bank of America was announced on Sunday, September 14 as Lehman Brothers went bankrupt.

– Société Générale rogue trader Jérôme Kerviel for stealing the limelight from the pompous talking heads at the Davos World Economic Forum.

– Former co-head of Citi’s investment bank Michael Klein for quitting when the writing was on the wall. In March 2008, Klein was shuffled sideways in favour of long-standing Pandit groupie John Havens. Klein’s demotion and departure were predicted in this column.

– Deutsche Bank’s Josef Ackermann for being the first banking chief to realize that bonus and boss were two words that did not go together. Ackermann renounced his 2008 bonus in October. Many others followed. It should be noted however that John Mack, chief executive of Morgan Stanley, did not take a bonus in 2007 following a large fourth-quarter loss at the firm.

– John Mack for keeping Morgan Stanley afloat when the short–sellers were circling in September.

– Bank of America’s chief executive, Ken Lewis, for steadfastly holding to his commitment to purchase US mortgage lender Countrywide, despite potential lawsuits and a plummeting housing market.

– The demonstrators at Bangkok airport in December 2008. All those bankers who could not afford their normal Christmas holidays in Thailand felt much better. The hassle factor was simply too high to reach the luxurious villa in Phuket.

– David Rosenberg, Merrill Lynch’s chief North American economist, who has been right all along about the recession, the sagging stock market and the benefits of investing in US Treasury bonds.

– Former senior Morgan Stanley banker Michael Dee for being the most senior American at a sovereign wealth fund. Of course, you need to exclude Hank Paulson from those ranks. Dee is now senior managing director (international) at Temasek.

– Prince Alwaleed bin Talal of Saudi Arabia for investing in Citi at the absolute bottom. Alwaleed bought Citi stock at about $4 in late November and saw his investment double in a matter of weeks. Smart trade, Prince. Too bad that you already had a lot of Citi stock that you had watched tumble from its January 2007 peak of $55.

– Former New York governor Eliot Spitzer for giving everyone something to laugh about in a terrible year. Sanctimonious Spitzer admitted a dalliance with a call girl in March and resigned.

– Former UBS chairman Marcel Ospel for giving last year’s bonus back. An impressive demonstration of self-denial. I wonder what Mrs Ospel said.

– David Einhorn, the hedge fund manager who took on the comely Erin Callan, Lehman’s former chief financial officer, and won.

– JPMorgan’s chief executive, Jamie Dimon, for running a very tight ship.

– Citi chief executive Vikram Pandit for just about holding it all together

– Stephen Green and Michael Geoghegan, chairman and chief executive of HSBC, for staying out of trouble and then offering the UK consumer a Christmas goodie bag in the form of additional mortgage lending.

– Liquidity: 2008 was the year to be in cash or top-quality government bonds. Anyone who had property, small company investments, private equity or hedge fund holdings was a loser.

The villains

– Mervyn King for simply not getting it. The Bank of England was still worrying about inflation in August 2008 when deflation was knocking at its door.

– Dick Fuld for simply not getting it. Apparently right up to the end, Fuld believed the US authorities would not let Lehman Brothers fail.

– US Treasury secretary Hank Paulson for letting Lehman go under and for so many other mistakes.

– RBS’s former chief executive, Fred Goodwin, for exuberantly expanding his empire and never showing much contrition. His hubristic bid for ABN Amro was the last hurrah at the bull market party. Think: Vodafone’s acquisition of Mannesmann in 2000. Within a year of buying Dutch, the Scottish bank unpeeled like an onion and the British taxpayer now owns some 58% of it.

– Nomura’s management for guaranteeing former Lehman employees two-year bonuses equivalent to 2007 levels. A shameful waste of shareholders’ money.

– Former Deutsche Bank board member and present Lonmin chairman Sir John Craven. Craven rejected Xstrata’s £33 a share offer at the top of the commodity cycle as undervaluing the platinum mining company. Lonmin’s share price declined by 80% in the next four months.

– Anyone who runs a hedge fund and promised investors absolute not relative returns.

– John Duffield, the sunken star of New Star Asset Management, a UK fund management group which took on too much debt at the top of the cycle. It is bizarre how even experienced and supposedly astute financiers were ambushed by the credit crunch.

– Former Citi chief executive Chuck Prince for simply melting away. Where is the dancing one now?

– Citi chief executive Vikram Pandit for letting Wachovia slip through his fingers. Not slick enough, Pandy.

– Eric Knight, founder of activist investor group Knight Vinke, for betting against one of the few banks (HSBC) that did well this year.

– Merrill Lynch’s chief executive, John Thain, for the embarrassing saga of his diminishing bonus. The Wall Street Journal reported that Thain asked the board for a $10 million bonus. However, it was then later announced that he would refrain from taking a 2008 bonus. All very odd. Especially when you consider that Thain, a previous president of Goldman Sachs and chief executive of the New York Stock Exchange, must be very rich. Why does an extra $10 million matter to him?

– Silda Spitzer, wife of the former New York state governor, Eliot Spitzer, for standing by her man

– Former UBS chairman Marcel Ospel for presiding over the decimation of a once great Swiss bank.

– Any company that needs to refinance debt in 2009.

– Bernard Madoff, the New York hedge fund manager who was arrested in December. Madoff seems to have made off with $50 billion of investors’ money. Just when you thought it was safe to go back into the ocean...

– Leverage with a capital L. Do you remember how in the boom time debt was divine? We marvelled at those, like the private equity boys, who did it to excess. Now debt is deadly. When BHP pulled its bid for Rio Tinto, investors fled from Rio wondering whether the mining company would be able to refinance debt due in 2009. As banks savagely shrink their balance sheets and investors are intensely risk averse, those who need to borrow are as exposed as those who walk naked down Park Avenue.

I would like to end on a cheerful note. A mole reports attending a wonderful birthday party in London thrown by Michael Hintze, legendary founder of the CQS hedge fund. Mole says that Hintze welcomed guests and reminded them that the party was planned in 2007 and paid for in 2007. "Ridiculous," snorts a commentator. "Why shouldn’t Hintze have a birthday party if he wants? All this sackcloth-and-ashes attitude is getting me down. Rich people should spend. Isn’t that what Keynesian economics dictates?" Mole also reports bumping into Prince Charles at the party. As the tentacles of the credit crunch stretch out everywhere, it is good to know that Her Majesty the Queen has decreed that the royal household must economize. The value of individual Christmas presents is to be capped at £50 and leftovers are to be served on Boxing Day. Leading by example seems to be the philosophy of the day.

So how was your month? Please send news and views to abigail@euromoney.com.