Some of the survivors were still recovering at hospitals while others were already in their homes
Banks such as UBS, Merrill Lynch and Citigroup have lost more than $400 billion in writedowns, slashed dividends, shed assets at fire sale prices, boosted capital via humiliatingly expensive secondary offerings to sovereign wealth funds in Singapore, China and the Gulf, fired “imperial CEO’s” such as Marcel Ospel, Stan O’ Neal and Charles Prince. Institutional investors are still in a state of shock over the sheer scale and speed of the cash hemorrhage in international banking balance sheets and the virtual destruction of their image as prudent managers of risk, leverage and depositor funds. In fact, a crisis of confidence haunts international banking in the summer of 2008. If AAA rated credit and mortgage derivatives can wreck such havoc, all banking assets are suspect and rating agencies have been stripped of their self serving roles as the neutral refrees of the capital market.
As the extremely high spread (90 basis points spread over Fed Funds) LIBOR proves, banks are now hoarding cash and reluctant to lend each other in the money markets. Meanwhile, off balance sheet vehicles, the fabled shadow banking system that triggered so much financial trauma, have effectively wounded the banking systems of the US, Britain and Germany.
The credit crisis has also exposed some bitter truths about global banking. One, CEO’s and central bankers mandated to run or supervise trillion dollar global banks acquiesced in their, to quote Citi’s Prince, leveraged dance of death. UBS, for instance, manages $2.5 trillion client funds and was viewed with awe as the quintessential conservative Swiss private bank yet Marcel Opsel and Peter Wuffli, its two Swiss executives, bet $100 billion in US mortgage securities and were clueless about flawed risk models, strategy or even basic risk management concepts in complex, illiquid securities markets.
Even though UBS was the most leveraged bank as earth by end 2007, with 54 times its capital in loans and securities of dubious values, took a colossal $38 billion hit on its senior- CDO tranches, endured a shareholder revolt at its Basel AGM and was stalked by an activist hedge fund whose brainchild just happened to be its former President (Luqman Arnold, a Brit forced out in a palace coup in 2001 by Ospel), its corporate DNA did not allow an outsider to solve the Herculean loss of its credibility in the global markets. The new chairman of UBS is Opsel’s former lawyer and its new CEO is Opsel’s private banking division head. Peter Korer and Marcel Roher are classic insiders and, you gressed it, as Swiss as Toblerone and cuckoo clocks.
Vikram Pandit, who inherited the bloated carcass of Citigroup, the worlds largest financial conglomerate put together by Sandy Weill, once hailed (and now reviled) as a Wall Street monetary statesman, was forced to take an axe to Citi’s balance sheet, expenses and global megalomania. The world’s mightiest bankers could not even cut costs, reassure shareholders about basic strategy, manage their hedges in the capital markets they created and defended with missionary zeal or even articulate a vision beyond bland platitudes.
Alan Greenspan is known as the maestro in the financial market. After all, Dr. Greenspan was the most powerful central banker in the world from 1987 to 2006. yet Greenspan created the epic monetary ease and regulatory incompetence that enabled Wall Street to finance a succession of bubbles, from junk bonds to LBO’s to Silicon Valley Internet IPO’s to subprime CDO’s. Hank Paulson, the legendary boss of Goldman Sachs, is the reputed intellectual powerhouse of the Bush White House (admittedly no great feat). Yet it was the same Hank Paulson who repeatedly reassured the world in early 2007 that subprime would be “contained”. While not as horrific as Bush’s great lie about Iraqi WMD’s the US Treasury now has egg on its collective face and the US banking system faces its worst crisis since the Great Depression.
The credit crisis has now mutated into something far more ominous. Losses on complex, illiquid securities were painful enough. Now money centre banks faces losses as NPL’s rise on credit cards, auto loans, LBO loans, commercial property and home equity as the US economy slips into recession. This recession will now spread across the world, as the vicious bear market in Asian and Eastern Europe stocks now attest. After all, if all was well with the credit markets as Bush and Paulson ritually intone (the worst is over!), why has the Bernanke Fed slashed interest rates by 300 basis points since September, allowed the dollar to collapse, ignited the white hot parabolic bull market in crude oil and gold, abandoned even the illusion of Uncle Sam’s fiscal discipline?.
It is premature to expect a turnaround story in banking in the near term, though I believe Luqman Arnold’s Oliphant hedge fund will force UBS to sell its investment bank and revert to a pure play Swiss money manager model. This would be replay of TCI’s Chris Hohn’s role in the eventual sale of ABN Amro to a RBS, Santander and Fortis consortium. As wounded investment banks trade at 7- 8 times earnings while asset managers like Franklin Templeton can easily command 15-18 times earnings, a sale or scaling down of UBS’s investment bank, whose wings as a risk taker are clipped anyway, the share price of the bank will double in Zurich. Could this be the subliminal message behind Dr. Rohner is a wealth management specialists, appointment as CEO? The natural buyers for UBS’s world class equities, capital markets and mergers advisory businesses would be Barclays Capital, the UK’s last remaining credible major league international bank.
In 1990, when Saddam invaded Kuwait, oil prices doubled, the US economy collapsed under a wave of property defaults and busted LBO’s, Citigroup and Chase Manhattan (where I worked at the time in the New York capital markets division) almost went bankrupt, with Fed regulators camped in the boardroom and share prices in the $8-10 range. But Citi’s historic capital raise from Saudi Prince Waleed marked its bottom. As the Clinton economic boom revived the bank’s fortunes, Citigroup share prices rose 18 fold. It was, of course, déjà vu when Citigroup (now a much larger financial beast) once again raised capital from Abu Dhabi and its 1991 “white knight” Saudi Prince. Will history repeat itself in the next three years? The prospects alone ensures that I will remain obsessed by the future of global banking.
Some of the survivors were still recovering at hospitals while others were already in their homes
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