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| The cult of the superstar banker is alive and well | The cult of the superstar banker is alive and well |
| (6 months later) | |
| Five years ago this week the banking crisis became serious. March 2008 saw the collapse in the US of Bear Stearns; Lehman Brothers would fail six months later. A good moment, then, to ask what has changed in the world of mega-banking. Two stories this week suggest, in cultural terms at least, the answer is: very little. The cult of the superstar banker is alive and well. | Five years ago this week the banking crisis became serious. March 2008 saw the collapse in the US of Bear Stearns; Lehman Brothers would fail six months later. A good moment, then, to ask what has changed in the world of mega-banking. Two stories this week suggest, in cultural terms at least, the answer is: very little. The cult of the superstar banker is alive and well. |
| The first story was the revelation that UBS agreed to pay a golden hello of £17.5m to Andrea Orcel, its head of investment banking. The Swiss bank, despite reporting a year of losses, thought the sum was nothing exceptional. "In line with market practice," it explained, it had to buy Orcel out of his accumulated but deferred rewards at his previous employer, Bank of America Merrill Lynch. In other words, don't blame us, blame Merrills. | The first story was the revelation that UBS agreed to pay a golden hello of £17.5m to Andrea Orcel, its head of investment banking. The Swiss bank, despite reporting a year of losses, thought the sum was nothing exceptional. "In line with market practice," it explained, it had to buy Orcel out of his accumulated but deferred rewards at his previous employer, Bank of America Merrill Lynch. In other words, don't blame us, blame Merrills. |
| What nonsense. UBS chose to hire Orcel and thus chose to pay the colossal sum. It did so after being hit by the £1.2bn Kweku Adeboli fraudulent trading loss and in the knowledge that it would be making thousands of staff redundant. Never mind all that, UBS seems to have concluded, we need a star. In a rational world, however, Orcel would have lost that status years ago for his central role as an adviser on the disastrous ABN Amro/Royal Bank of Scotland deal. We need him anyway and we'll take the £17.5m on the chin, UBS decided. Astonishing. | What nonsense. UBS chose to hire Orcel and thus chose to pay the colossal sum. It did so after being hit by the £1.2bn Kweku Adeboli fraudulent trading loss and in the knowledge that it would be making thousands of staff redundant. Never mind all that, UBS seems to have concluded, we need a star. In a rational world, however, Orcel would have lost that status years ago for his central role as an adviser on the disastrous ABN Amro/Royal Bank of Scotland deal. We need him anyway and we'll take the £17.5m on the chin, UBS decided. Astonishing. |
| The second item was the damning report by a US Senate sub-committee on JP Morgan's "London whale" incident in which $6bn of trading losses were suffered in the bank's investment office in London. "Representations made by the bank were incomplete, contained numerous inaccuracies and misinformed investors, regulators and the public," the investigation concluded. | The second item was the damning report by a US Senate sub-committee on JP Morgan's "London whale" incident in which $6bn of trading losses were suffered in the bank's investment office in London. "Representations made by the bank were incomplete, contained numerous inaccuracies and misinformed investors, regulators and the public," the investigation concluded. |
| So is Jamie Dimon, JP Morgan's chief executive who initially described the affair as "a tempest in a teapot," for the chop? Almost certainly not. | So is Jamie Dimon, JP Morgan's chief executive who initially described the affair as "a tempest in a teapot," for the chop? Almost certainly not. |
| Deputy heads have rolled already. JP Morgan says it has "identified many of the issues cited in the report." And regulators, in the form the Office of the Comptroller of the Currency, may be too embarrassed to press the matter because of their own failure to pursue the whale tale. | Deputy heads have rolled already. JP Morgan says it has "identified many of the issues cited in the report." And regulators, in the form the Office of the Comptroller of the Currency, may be too embarrassed to press the matter because of their own failure to pursue the whale tale. |
| So it's odds-on that Dimon will survive. He remains firmly within the banking superstar club and his talents are lauded regularly by Warren Buffett. | So it's odds-on that Dimon will survive. He remains firmly within the banking superstar club and his talents are lauded regularly by Warren Buffett. |
| Bob Diamond could be forgiven for feeling bitter. He was in the club, too, and Barclays' shortcomings on the regulatory front could even be considered modest when set against JP Morgan's during the whale incident. Bad luck, Bob, you were an exception. | Bob Diamond could be forgiven for feeling bitter. He was in the club, too, and Barclays' shortcomings on the regulatory front could even be considered modest when set against JP Morgan's during the whale incident. Bad luck, Bob, you were an exception. |
| The business lobby and the banks | The business lobby and the banks |
| Still, at least someone can still summon some indignation on banks and pay. He is Simon Walker, head of the Institute of Directors, who this week let rip, citing the awards of £1m-plus to 523 employees of Barclays and Royal Bank of Scotland. | Still, at least someone can still summon some indignation on banks and pay. He is Simon Walker, head of the Institute of Directors, who this week let rip, citing the awards of £1m-plus to 523 employees of Barclays and Royal Bank of Scotland. |
| "I'm not a rabid anticapitalist. But even I believe this state of affairs is unacceptable. Shareholder value has been destroyed, capitalism has been given a bad name, key measures of the market have been manipulated for cynical gains, taxpayers have shelled out billions to bail banks out, and yet vast rewards packages are still being handed out," he said. | "I'm not a rabid anticapitalist. But even I believe this state of affairs is unacceptable. Shareholder value has been destroyed, capitalism has been given a bad name, key measures of the market have been manipulated for cynical gains, taxpayers have shelled out billions to bail banks out, and yet vast rewards packages are still being handed out," he said. |
| Strong stuff, all the more powerful for coming from a business lobbying group. Indeed, that was a point Walker made himself. "The IoD's role is to promote good business, not simply defend everything that any business does. To defend the reputations of the millions of businesses who do the right thing, we must call out those who do wrong." | Strong stuff, all the more powerful for coming from a business lobbying group. Indeed, that was a point Walker made himself. "The IoD's role is to promote good business, not simply defend everything that any business does. To defend the reputations of the millions of businesses who do the right thing, we must call out those who do wrong." |
| So would the CBI – Britain's other big business lobbying group – like to join in? | So would the CBI – Britain's other big business lobbying group – like to join in? |
| Up to a point. "It was a brave speech that made a lot of important points," says director general John Cridland. "I have a lot of commonality with Simon but it's for each of us in our own organisation to choose our own language. Banks should follow the road they have started down. That is, bonus pools should be smaller and more able to be clawed back." | Up to a point. "It was a brave speech that made a lot of important points," says director general John Cridland. "I have a lot of commonality with Simon but it's for each of us in our own organisation to choose our own language. Banks should follow the road they have started down. That is, bonus pools should be smaller and more able to be clawed back." |
| Cridland argues that the CBI is far from being an apologist for banks, despite counting a few within its membership. And, he's quite correct to say that various CBI submissions have been strong in calling for more competition between banks and in arguing for a need for a return to relationship banking to serve businesses better. | Cridland argues that the CBI is far from being an apologist for banks, despite counting a few within its membership. And, he's quite correct to say that various CBI submissions have been strong in calling for more competition between banks and in arguing for a need for a return to relationship banking to serve businesses better. |
| All the same, the IoD's stronger language sounds more like the authentic voice of frustrated non-bankers in the business world. In private, you'll find plenty of senior business people who would regard even Walker's words as polite. | All the same, the IoD's stronger language sounds more like the authentic voice of frustrated non-bankers in the business world. In private, you'll find plenty of senior business people who would regard even Walker's words as polite. |
| How to unwind QE | How to unwind QE |
| Terrific news, the Treasury could be in line for a £51bn windfall, which will come in handy. Who says? The Bank of England, which has been calculating what will happen when the great quantitative easing programme is unwound and £375bn-worth of gilts are sold back to the market. Ok, that £51bn figure is not set in stone. If one tweaks a few variables on gilt yields, the Bank's computer spits out a loss of £8bn sometime around 2020. That's not so good. | Terrific news, the Treasury could be in line for a £51bn windfall, which will come in handy. Who says? The Bank of England, which has been calculating what will happen when the great quantitative easing programme is unwound and £375bn-worth of gilts are sold back to the market. Ok, that £51bn figure is not set in stone. If one tweaks a few variables on gilt yields, the Bank's computer spits out a loss of £8bn sometime around 2020. That's not so good. |
| Actually, it's hard to shake the feeling that these theoretical calculations may be pointless. Here's Nick Parsons, strategist at National Australia Bank: "The Bank of England will never sell any of the gilts in its asset portfolio. Not one. Ever. They will all be held to maturity. The very notion of QE unwind is a scam. A confidence trick designed to slow the pace of currency debasement." | Actually, it's hard to shake the feeling that these theoretical calculations may be pointless. Here's Nick Parsons, strategist at National Australia Bank: "The Bank of England will never sell any of the gilts in its asset portfolio. Not one. Ever. They will all be held to maturity. The very notion of QE unwind is a scam. A confidence trick designed to slow the pace of currency debasement." |
| You can see what he means. Would investors applaud the appearance of a profit for the Treasury, which underwrites the scheme, and praise the wisdom of our central bank? Well, a few might if the economy was back on the rails and growing strongly. Alternatively, investors might fear that future governments would believe they had found a magic formula for creating money painlessly. "The very moment that investors wise up to the fact that QE will never be reversed is a problem," predicts Parson. | You can see what he means. Would investors applaud the appearance of a profit for the Treasury, which underwrites the scheme, and praise the wisdom of our central bank? Well, a few might if the economy was back on the rails and growing strongly. Alternatively, investors might fear that future governments would believe they had found a magic formula for creating money painlessly. "The very moment that investors wise up to the fact that QE will never be reversed is a problem," predicts Parson. |
| For now, it's a problem for the future. But the unwind question will have to be confronted at some point since it's now four years since the launch of the initial £200bn programme, which is a very long time to deploy emergency measures. It may turn out that getting into QE was the easy bit. | For now, it's a problem for the future. But the unwind question will have to be confronted at some point since it's now four years since the launch of the initial £200bn programme, which is a very long time to deploy emergency measures. It may turn out that getting into QE was the easy bit. |
| Betting against the Pru | Betting against the Pru |
| Congratulations to Lansdowne Partners, which went against the hedge fund crowd by taking a 6% stake in Ocado last year. Smart move: the online grocer's share price has doubled this year and on Friday regained its 2010 flotation value. | Congratulations to Lansdowne Partners, which went against the hedge fund crowd by taking a 6% stake in Ocado last year. Smart move: the online grocer's share price has doubled this year and on Friday regained its 2010 flotation value. |
| Hold the celebrations, though, Lansdowne was firmly on the wrong side of another big share price move this week. At Prudential, up 13% this week, it has a long-standing short position of 0.9%, which is a chunky bet given that the Pru is now a £30bn company. | Hold the celebrations, though, Lansdowne was firmly on the wrong side of another big share price move this week. At Prudential, up 13% this week, it has a long-standing short position of 0.9%, which is a chunky bet given that the Pru is now a £30bn company. |
| Of course Lansdowne has plenty of winners in the financial sector, like Lloyds, to counter the losses on the Pru short. But it will be interesting to see how long it is willing to hold out. The Pru, on the back of success in Asia, is suddenly deeply popular. | Of course Lansdowne has plenty of winners in the financial sector, like Lloyds, to counter the losses on the Pru short. But it will be interesting to see how long it is willing to hold out. The Pru, on the back of success in Asia, is suddenly deeply popular. |
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