Vikram Pandit, chief executive of Citigroup, received an unwelcome phone call
on Tuesday. Ten of his rivals had just been given permission to pay back
money owed to American taxpayers, freeing themselves from the burdens of
state ownership. Citi, Pandit was reminded, was not among them.
Sheila Bair, chief executive of the Federal Deposit Insurance Corporation, one
of the many regulators Pandit now has to answer to, had called to make sure
this was clear.
She demanded that Pandit pick up the pace on his efforts to clean up Citi’s
balance sheet and overhaul senior management. As for Pandit himself, Bair
has made no secret of the fact that she thinks he should be out of a job.
The call came as confirmation, if any were needed, that Pandit has been one of
the biggest losers from the global credit crunch. Citi, once the world’s
biggest bank, is now being dismantled under the watch of US regulators after
being forced to accept $45 billion of state aid. Bank of America / Merrill
Lynch and UBS have similarly been knocked from the top perch of
international finance, thanks to huge losses on sub-prime investments.
While these institutions tend their wounds, the handful of banks around the
world that have dodged the worst of the crisis are forming a new financial
elite.
Goldman Sachs, JP Morgan and Credit Suisse are emerging from the rubble of the
global recession as the biggest winners in investment banking – followed
closely by Deutsche Bank and Barclays Capital. They are making big profits
and poaching top staff from their rivals.
Analysts believe that over the next two years, these five banks will lead a
“super league” of financial giants that will make billions from the
continued strains in financial markets. They are already being dubbed the
new kings of Wall Street.
“Those banks that have come through this with their brands intact, the
reputation of their management intact and without government ownership, have
found themselves at a huge advantage,” said a senior director at one of the
world’s biggest banks. “As it stands, there is a group of institutions that
look very well positioned to start pulling away from the pack.”
A leading executive at a top Wall Street firm added: “Those of us who are left
standing are making very good money.”
Lloyd Blankfein, chairman of Goldman Sachs, passed a humble memo round his
senior staff last week, after confirming that the bank is paying back the
$10 billion it was forced to borrow from the American government at the peak
of the credit crisis last autumn.
Although Goldman had never needed the emergency cash, Blankfein said the firm
was “grateful” for everything the government had done to stabilise the
system. “But real stability can only return if our industry accepts that
certain practices were unhealthy and not in the long-term interests of
individual institutions and the financial system,” he wrote.
Blankfein can afford to be statesmanlike in response to the crisis. Goldman
posted a 20% rise in profits for the first quarter of 2009, boosted by an
all-time record performance from its fixed-income, currencies and
commodities trading businesses. The indications are that the second quarter
is continuing in a similar vein.
Deutsche Bank, Credit Suisse and Barclays Capital, the other serious players
in this field, are benefiting from the same trends.
JP Morgan analyst Kian Abouhossein recently predicted that the blow-out
performance in so-called “flow-trading” could continue until 2010. According
to Morgan Stanley analyst Huw Van Steenis, these “flow monsters are likely
to have the biggest upside in the changing industry structure”.
A senior banker said: “Virtually nobody has any money to put to work in the
markets now, apart from this small group of banks. Less competition means
more business at wider margins. In crude terms it’s that simple.”
Credit Suisse has seen its market share of some business lines soar,
particularly in areas like interest-rate trading and prime brokerage –
trading for hedge funds. Like the rest of the elite, it has picked up
business that previously went to Lehman Brothers, Bear Stearns or perceived
credit-crunch losers such as Merrill Lynch. That’s not the whole story,
however.
“The message we’re getting from clients is that we’ve been picking up business
because our guys have been able to focus on the job and aren’t spending all
their time getting caught up in internal politics or coming to grips with
life under state ownership,” said a senior banker at Credit Suisse.
The huge volume of share issues and debt raisings by companies desperate for
cash also means that big fees for the few banks with a balance sheet strong
enough to take on the job. JP Morgan, which has kept its nose clean under
the leadership of Jamie Dimon, has been getting more than its fair share of
that work.
Van Steenis claimed that margins for most investment banking products have
widened by between 50% and 300%. “Rights issues this year are paying about
50% higher fees per dollar raised than 12 months ago. To conduct a
foreign-exchange trade costs twice as much as it did a year ago,” he said.
Although Van Steenis is unable to praise his employer, Morgan Stanley is also
among the big beneficiaries from these lines of business and is arguably
part of the new elite as well.
The fee bonanza will not continue indefinitely but while it does, the elite
group of banks will amass more and more capital, creating a bigger gap
between the haves and have nots. What is not yet clear is whether
governments and regulators around the world, keen to clamp down on financial
excess, will allow this new elite to get their own way.
“You can talk about winners if you want, but it’s not abundantly clear what
the prize is that these guys are winning,” said one analyst. “The money
being made at the moment in trading and underwriting is an all-time one-off.
“The long-term future is all about lower leverage, lower returns on capital
and a more stable financial system.”
Financial markets are not yet convinced that the winners and losers have been
fully separated from one another. Shares in JP Morgan, Barclays and Deutsche
Bank are all trading below their book value. The market fears that losses
from their corporate loan books could yet derail profits from investment
banking.
UBS, on the other hand, widely considered to be Europe’s biggest credit-crunch
casualty, is valued at about 1.2 times its book value. It has already
started to deal with its problems since Oswald Grübel took over as chief
executive, and investors appear to think the worst is over for the Swiss
bank.
Ken Lewis, chief executive of Bank of America, spent most of last week
detailing how Merrill Lynch had been forced upon him by the American
authorities. While his comments are likely to cause even more staff
defections from the remnants of Merrill, most bankers still bet that the
firm will stage a comeback eventually.
“The big institutions are very difficult to kill off,” said Guy Dawson, who
spent many years at Merrill but now works for Tricorn Partners, the boutique
advisory firm .
The regulatory response is also something of an unknown. Politicians are still
uncomfortable with the idea that banks can grow to a size where they become
too big, and too system-ically important, to fail. They want to avoid
taxpayers having to bail out banks in the future.
The handling of Royal Bank of Scotland and Citigroup provide evidence that
this is already happening. Both banks are under pressure to shrink their
balance sheets, sell assets and go back to their roots as
domestically-focussed financial institutions. All that it has really served
to do is to make the remaining big banks even more powerful. The capital
needed to grow businesses and fuel economic growth now lies in fewer hands
than ever.
Big lending banks that still have strong balance sheets, such as HSBC and
Standard Chartered, know that their clients are increasingly dependent on
them for cash. Along with the new elite of investment banking, these banks
are now back in the driving seat of the economy. They are no longer just
writing cheques.
According to Slawomir Krupa, chief-of-staff at Société Générale’s corporate
and investment banking arm, banks are moving back to forging “lasting, deep
relationships” with their clients. “Banks are likely to have fewer clients
but they will look to do more with them and give them more,” he said.
Société Générale is one of the big banks that has decided to excel by staying
out of the global elite. It is one of a number of banks that are focusing on
what they do best, rather than attempting to compete for lucrative work
advising on big mergers or takeovers.
Its compatriot, BNP Paribas, is also sticking to its knitting – and doing so
very successfully. There are other big banks out there, but they also seem
to show little inclination to compete with the new elite in investment
banking.
China’s ICBC is now the world’s biggest bank by market value, yet it has more
than enough business on its own doorstep.
Japan’s Nomura is attempting to build a serious investment bank from the
remnants of Lehman’s European and Asian businesses and through a hiring
spree in America. Meanwhile, boutique advisory houses yap at the heels of
their larger rivals, picking up roles here and there. Nonetheless, the big
banks look stronger than ever.
“There’s a two-tier banking system now, formed from winners and losers,” said
a senior banker in New York. “That’s more apparent than ever.”
