Kirk's Book Reviews
Kirk's Book Reviews
Here's where I like to review contemporary and classic books in the fields of Literary Fiction, Economics, Politics and History. I also use this forum to post regular articles and announce updates on current projects, so keep checking it on a regular basis!
Like other writers, I'm passionate about discussing books that have enthralled me or changed my perspective on something.
Is there anything better than a good read?
Review of Crash Bang Wallop: The Inside Story of London's Big Bang and a Financial Revolution that Changed the World by Iain Martin
|Posted on April 9, 2017 at 2:55 PM||comments (327)|
My rating: 4 of 5 stars
Nothing encapsulates the image of Thatcherism with more pertinence than the flash, 1980s stockbroker quaffing champagne. Replete with braces, a brash Essex accent and philistine tastes in art and culture, the English yuppie represents everything the left-wing establishment detests. Though exaggerated and at times cruel, the caricature endures to this day and is the face of Margaret Thatcher’s misleading statement that ‘there is no such thing as society.’ It is also a reason why the City is disdained as a place of greed and excess, where butcher-thy-neighbour and psychotic ambition are established moral codes. At least the old aristocracy had the good sense not to flaunt their wealth. So how did we come to hold our financial sector in such low regard even before the 2008 global credit crunch?
Iain Martin’s ambitious book builds on the work of Philip Augar’s, The Death of Gentlemanly Capitalism (Penguin, 2000) to explore how the government reforms of the 1980s transformed London from an antiquated financial capital to a modern behemoth at the centre of the late twentieth century’s push towards globalisation. Surprisingly few studies have emerged over the last two decades on this subject and most have been written through the prism of bank failures post-2008, one of which Iain Martin authored in his exposé of the colossal mismanagement at RBS. This latest book is a welcome development and early candidate for the definitive account of an era that changed Britain’s financial, social and political landscape.
It may seem like a relic from a distant age, but most economic policies of the post-war period assumed that foreign exchange controls, state-run industries, restrictions on foreign ownership of UK assets and occasional devaluations of the national currency were a fact of life. The City of London Corporation and the Stock Exchange had their own rules on membership and etiquette. That the latter was a closed shop is undoubted: under-capitalised, governed by school tie connections, protected and insular, the Stock Exchange served a membership of 4,500 people. An old boys club like this was not the embodiment of ‘popular capitalism’ envisaged by Margaret Thatcher, the grocer’s daughter. As Iain Martin points out, ‘One of the great myths – fostered by the privatisations and reforms she introduced from which flowed great wealth to an old and new City generation – is that she was always a natural supporter of the Square Mile and its grandees…’
A survey of stock market rules at the time show why the Square Mile attracted the ire of the Labour Government of the 1970s and saw it threatened with action by the Restrictive Practices Court. Minimum commissions on trades had been in place since 1909 to protect the income of members and limit new entrants from undercutting their profits. No appeals process existed for applicants denied membership of the stock exchange and, besides being ostracised in social circles, a raised eyebrow from the Governor of the Bank of England was the most severe punishment a man could expect for insider trading. One of the most bizarre relationships involved the Treasury, where the government issued gilts on an exclusivity basis via investment house, Mullins, ‘which involved the ritual of its senior partner walking across from the Bank of England wearing a top hat to announce to the market any changes in the bank rate.’ (p. 72) Needless to say, foreign membership of the stock exchange was almost impossible and those not wearing pin-stripe suits and bowler hats knew their place in the hierarchy.
Yet some of the old regime worked well. Stockjobbers were the true market-makers buying stocks and shares on the primary market and selling them to stockbrokers. They earned a profit on the spread between the buy and sell price. This separation between stockbrokers and jobbers, known as ‘single capacity’, looked after the customer’s best interests: ‘The old separation between brokers and jobbers offered the customer some protection from conflicts of interest, because the client knew that their broker had a sole responsibility to buy their shares at the best available price, and could not collude with the jobber.’ (p.90) Most of the jobbing firms such as Wedd Durlacher (later purchased by Barclays) and the broking houses like Hoare Govett and James Capel (later absorbed into HSBC) were limited liability partnerships. The senior partners had their capital at risk and would not countenance reckless trades from those lower down the hierarchy. Even the cockney wide boys rising through the ranks became gentrified and members of polite society. Yet little scrutiny stopped their successors from indulging in their own casino banking operations when re-constituted as public listed firms. The CEO and Chairman of these mega banks answered to institutional shareholders and had none of their own capital at stake in 2008.
Britain’s class system may be fading into irrelevance, but it held the City together before Big Bang. Recruitment for merchant banks depended on Oxbridge and public school connections; the clearing banks (e.g. Barclays and Lloyds) opted for grammar-school graduates; and jobbing firms gave the humble cockney a footing from messenger boy to senior trader before the positions became the exclusive preserve of university graduates in the late 1980s. The end of restrictions on foreign investment and the abolition of single capacity did much to erode this hierarchy. It’s also one of the reasons why the attempts by Nat West, Barclays, Midlands and HSBC to build their own investment banks failed in the late 1980s. Aristocrats from the merchant banks disdained meetings and paperwork, but the grammar boys in the clearing banks didn’t have the courage to stand up to them. Unlike the American investment banks, management at the new British conglomerates relied too much on an officer class leading by instinct, rather than the scientific approach adopted by global competitors at Goldman Sachs et al. Philip Auger describes this amateurish way of doing things as ‘gentleman to the Slaughter,’ and he’s not wrong in Martin’s opinion.
Much of Big Bang abolished this world of nepotism and drunken lunches and saw it replaced with the American culture of morning workouts in the gym, mineral water instead of port and punishing hours at the trading desk. The author identifies four factors that brought in this seismic cultural shift. One: Chancellor Geoffrey Howe’s monumental decision to extinguish all exchange controls in 1981 and to encourage foreign direct investment in the UK economy. Two: the end of fixed commissions and the go-ahead for merchant and clearing banks to integrate jobbing and broking firms into one house of operations. Three: London’s perfect time-zone position between New York and Tokyo. Four: the Thatcher government’s complete indifference to foreign ownership of UK firms and government-issued debt.
Unfortunately, as Martin observes, this has resulted in the ‘Wimbledon effect’, the scenario where the top ten investment banks in London are American, Swiss and German. In other words, the playground is dominated by foreigners, even if Britain’s graduate workforce is still the main beneficiary of this overseas largesse. Morgan Grenfell, Schroders, Kleinwort Benson, Warburg, Hambros, Barings – these are now footnotes in history. Not one UK investment bank remains independent and in the top division, having failed to compete with the likes of Goldman Sachs, Morgan Stanley, Nomura, UBS, Deutsche Bank and JP Morgan.
Of course, the entrance of the American and Japanese banks in the 1980s had its benefits for the senior partners at the old jobbing and broking firms. Approximately 750 millionaires were created overnight as merchant and clearing banks bought up specialist firms in their quest to become global financial supermarkets. To some, this was a betrayal by the old grandees and Martin credits this as one of the factors that created the pay explosion and short-term loyalty that was once anathema in the old boys’ network. The so-called ‘marzipan’ layer of junior partners and managers can hardly be blamed for their obsession with pay and bonuses when a generation of gentleman capitalists sold up and buggered off to the Cote d-Azure for a comfortable retirement at the first sign of a favourable bid.
A glance through the latest edition of The Economist illustrates how much London has changed since the reforms of 1986. Overseas investors hold assets worth 500% of GDP in 2017. Even pension funds such as the Ontario Teachers’ Pension Fund own important assets, like City Airport in London. The contribution of the City to the UK economy is astounding. ‘In total, the City of London estimates that financial services contribute £66.5 billion in taxes to the Treasury annually. That amounts to 11 per cent of the national total. The 2.1 million working across the UK in banking, and other services such as accountancy, constitute 7.2 per cent of workers.’ (p. 293)
Britain is an investors’ paradise, as Alex Brummer points out in his thought-provoking book, Britain for Sale: British Companies in Foreign Hands – The Hidden Threat to our Economy. Everything from our water companies to railways are in the hands of foreign owners, but there are also benefits from being so open. The 2011 flotation of Anglo-Swiss mining giant, Glencore, for $59.2 billion, remains the largest deal in European history. The City has the expertise to raise billions in capital, and it’s small wonder Teresa May is trying to persuade Aramco, Saudi Arabia’s state-oil company, to launch its IPO in London for what promises to be the biggest flotation in corporate history.
The Thatcher government’s insistence on market competition and unlimited capital flows can claim some credit for London’s world-class position in 2017, but Martin is right to point out that Seigmund Warburg’s contribution to financial innovation with the introduction of the Eurodollar bond in 1963 should not be overlooked. The City was already a major player with intellectual expertise, heritage and innovation long before Big Bang. Nor should the 1980s be seen as the hey-day of unregulated, laissez faire capitalism in the City. Thatcher’s critics have succeeded in painting the era as one of greed and market fundamentalism, but regulation increased during this era as London grappled with the gradual erosion of capital borders, merger mania and the explosion of debt securities. Indeed, the Thatcher government made insider trading a statutory offence, beefed up the supervisory powers of the Bank of England and introduced numerous consumer protection bills in the House of Commons.
Martin’s study is not without its flaws. Every bungled reform or innovation is ‘typically British’ and all fortuitous events are described as such, as though it’s in the national character to hope for the best and muddle through. His editor might also have been more competent in routing out the occasional sentence where not one, but two, adverbs predominate (‘The best stockbrokers and jobbing partnerships… which traditionally simply advised clients doing deals…’;). Likewise, readers not acquainted with British political history might need an explanation of the Westland Affair and how the leaking of a letter from the Solicitor General’s office created a constitutional crisis and almost brought down the Thatcher government.
However, Martin’s background as a journalist allows him to glimpse the bigger picture where a financial historian may not see the wood for the trees. This book is also a story of how individuals like Reg Ward and Gooch Ware Travelstead saw a future for London’s expanding finance sector in the deserted docklands of east London. Their dream begat Canary Wharf and the modern icons of high finance we now associate with the City. This regeneration should be judged a success when you consider the surrounding boroughs suffered a net population loss of over 150,000 people in the period 1978-1983 and an unemployment rate hovering around 20 per cent. Unfortunately, few locals these days can afford to live in the area where property is now in the hands of the Russian, Chinese and Arab owners seeking holiday homes. The cockney spirit does not prevail here anymore, but can still be found in Essex, where most have emigrated over the last 20 years.
The biggest question now is how will the City adapt in a post-Brexit world? The European Commission and Council of Ministers will not tolerate London being the major clearer of Euro transactions once Britain leaves the club in 2020. In 2013, the UK accounted for 78 per cent of all foreign exchange trading in the Euro and 85 per cent of all hedge fund assets in the EU. Banks in Frankfurt, Paris and Madrid are way behind London but will get a chance to grab large parts of the currency trading business. Foreign investment may also decline when the UK can no longer be used as a base for financial services across the entire EU.
But the author is not too pessimistic when looking at the financial innovation of the City over the centuries. Britain remains committed to free trade (but not free movement of people from outside countries) and is relaxed towards foreign ownership of UK assets. The future may be more capitalism, not less. Who else, other than Wall Street and Silicon Valley, is better placed to cultivate the emergence of Fintech as the financial service sector looks set for another round of creative destruction that may even lead to the end of money as we know it?
In the meantime, will it be such a bad thing if Goldman Sachs scales down its presence in London following Brexit? Even Thatcher would admit it’s not a bad thing to have a British champion in the investment banking sector. The unlikely exodus of American banks may create more opportunities closer to home.
|Posted on March 28, 2017 at 4:45 PM||comments (0)|
My rating: 4 of 5 stars
The last twelve months have been tough for neo-liberalism. The election of a protectionist in the United States and the shock decision of the United Kingdom to leave the European Union have dealt major blows to the Anglo-Saxon world and shook the foundations of the Washington Consensus.
A survey of Europe is just as worrying. ‘Illiberal Democracy’ in Hungary and Poland is on the rise; Greece, the birthplace of western civilisation, hovers on the verge of third world oblivion; and France and Italy remain the biggest threat to the old world’s political and economic stability. For the first time, people are asking if the multi-party democratic state is the problem. But what improvements can we make beyond the existing political system to ensure our societies are fair and responsive to the needs of everyone?
Astrophysicist, Brett Hennig, has a solution that is more radical than anything proposed by the socialist left or capitalist right. How about we abolish general elections, render political parties obsolete and ban the influence of high finance and wealth on our political system? Even more important, let’s have real government by the people for the people with the introduction of an annual lottery where our legislators are chosen from a random and stratified sample of society.
Hennig’s alternative system is called Sortition, a word that has yet to acquire wider currency in the political lexicon of the town hall, focus group or university campus. Nonetheless, in the author’s view, the idea is advanced enough to merit nearly 200 pages of study, including an excellent analysis of the way representative democracy as practised at the ballot box has always been captured by oligarchs and wealthy capitalists.
He may have a point about the exhaustion and inertia in today’s parliaments. The current system of representative democracy appears incapable of addressing the concerns and economic plight of the poorest and least mobile in society. Our conservative leaders promote ‘aspiration’ as a tool for advancement and cling to ‘trickle down’ theories of wealth distribution as the panacea for rising income equality. The left focus on ending austerity, re-nationalising industry and giving the state more clout in economic affairs. Political parties in the centre ground struggle to dismiss the perception that they are the cosmopolitan, internationalist elite that conspired to bring globalisation to our doorstep. But to the author, this is just a cover for the sham spectacle of a system played out between plutocrats: ‘An election is an essentially elitist construction that delivers power into the hands of an unrepresentative assembly dominated by people of wealth and privilege.’ (p. 175)
Is this hyperbole or a disturbing truth? First, let’s assess what our forefathers meant by democracy in the post-enlightenment era. Hennig, starts with ancient Greece, where Athenians had a different concept of democracy to the one we associate with today. Here, the executive decision-makers were chosen by lot rather than at the ballot box. These Hellenic citizens were under no illusion that a system of popular voting would lead to rule by oligarchs, a belief that the founding fathers of the USA appear to have shared over two thousand years later. It begs the question why the masses have never taken over the political system in the age of universal suffrage.
This leads us to one of the critical conclusions in this book: it’s a fallacy to assume the current system of representative democracy as practiced by the USA, India, Japan and the EU countries has been captured by elites. This has always been the case. To back this up, Hennig treats us to a chapter on how politicians in the US and UK are more responsive to the propertied and moneyed classes than the poorest in our society. The case studies and academic citations are impressive, but perhaps not as extensive as they should be for such a contentious statement. Does any historian in Britain believe Clement Atlee’s Labour Government of 1945-51 had an unhealthy preoccupation with protecting plutocrats at the expense of the working class?
So what are the positives of the Sortition alternative?
We’ll see a definite end to money as the biggest influence on politics and the competing interests groups vying for a slice of the pie will find it harder to dictate the distribution of resources. Politicians and parties will no longer be forced to promise all things to all people to win votes and people from all walks of life can make executive decisions that will affect their own particular circumstances. (E.g. disabled people having a say in how public funding is allocated, lower-income people choosing how to close the income inequality gap, etc.)
And how many will be relieved if politics is no longer an arena for ego-driven, power-hungry individuals from elite institutions? Sortititon will solve the problem of elections failing to represent the true diversity of society; the experts advising the chosen executive bodies will be more visible and no longer able to pull the strings behind the scenes. Even the rational-choice theorists might find positives: it should be easier to end rent-seeking distortions once the new legislators are made aware of restrictive economic practices. After all, those making decisions are not in danger of being de-selected by a political party; nor can they be stripped of funding from lobbyists or live in fear of losing their seat at the next election.
This may sound good in principle, but the discerning reader should not forget their scepticism. Brett Henning claims to be neither from the left or right of the spectrum, but there’s no doubt he is from the former. Sortition is unapologetic social engineering. In his view, ‘If half of parliament were composed of women, had many young adults and was dominated by people from working-class backgrounds, it would produce very different legislation.’ (p.164) This sounds similar to the crusading attitude of the social justice movement that sweeps through civil life and infects our schools and everyday discourse with its desire to eliminate rule by middle-aged white men. Where will this end?
Sortition could also be a threat to national unity when rolled out at a more decentralised level; this is also why the author envisages more of a ‘bottom-up’ rather than ‘top-down’ revolution. No consideration is given to the idea that the strongest societies have a national character or collective identity that brings them together. Sortition could undermine the type of governing ideology that unites us and lead to yet more moral relativism and an obsession with diversity. One can imagine how difficult it would be for a deliberative government to engage in foreign affairs with other nations, never mind earn their respect.
The way we arrange our public affairs will always invite fears that government by the masses equals chaos. Monetary policy may take an even more populist approach than under representative democracy. And how can the apathy of ordinary people be reversed in our shallow, consumer-driven society where material abundance dominates? Towns and cities with large Islamic populations may even pass legislation that runs contrary to democratic ideals of tolerance, human rights and the sovereignty of the individual. Though the new citizen legislators can be removed by a vote of no confidence, this may result in political paralysis. Especially if a strong civil society and independent media are constantly defenestrating lawmakers chosen by lot. Will the masses lose faith and become cynical?
And what about more abstract philosophical concerns? Where will restless and ambitious people turn their attention if denied the opportunity to gain recognition at the ballot box? The human need for ‘thymos’ is the reason why Francis Fukuyama identified liberal democracy, for all its flaws and obsessions with empowering obscure minority causes, as the one most able to satisfy both the master and the slave in their need for recognition. Those denied access to public recognition in political office will need an outlet for their ambition; but not everyone can be an investment banker or corporate lawyer. Who’s to say we don’t end up with a shadow state in the military and security services where powerful individuals come together to rule by stealth?
These are just a few of the issues that Sortition raises, but herein lies the beauty of this book. A good piece of political theory should have your brain working in overdrive and lead you to ask questions that concern the whole of humanity. The potential to organise our daily affairs in the most just and equitable manner affects us all and will continue to define our evolution as a civilised species. Brett Hennig dares to ask the impossible and invites us to have faith in our imagination as rational and highly-developed human beings.
You may not agree with his optimism for a painless transition from ballot box to government by lot and it may prove impossible and unworkable. But a new word has entered the political vocabulary and you should be hearing more of it in the future.
|Posted on September 3, 2016 at 6:55 PM||comments (295)|
My rating: 4 of 5 stars
The people behind the merger of Bank of Scotland and Halifax in 2001 are villains today, but at least they had the foresight not to call the new behemoth BOSH. A lending institution with that name would be remembered more widely, yet HBOS is the forgotten bank of the 2008 credit crunch. It entered into a shotgun marriage with Lloyds TSB and landed its rescuer with write downs of £18 billion within the space of months. The subsequent outrage settled on Lloyds rather than its newest acquisition, while RBS and Northern Rock came to symbolise the excesses and criminal irresponsibility of the UK banking sector.
Eight years on, it’s worth recalling just how close the Halifax and Bank of Scotland came to bringing down the British economy. Few public companies suffered more after Lehman Brothers filed for bankruptcy on Monday 15th September 2008. Indeed, the HBOS share price tanked by 17.5 percent within hours and at one point suffered a staggering collapse of 56 percent. No wonder 72,000 staff, 22 million customers and 1.2 million investors wondered if their money would be safe. Depositors withdrew an estimated £30 billion from the bank in two weeks. How could this happen to a financial institution that held less than 1 percent of its assets in US sub-prime securities and had no presence in the investment banking world?
Ray Perman, a former journalist at the Financial Times, gives us the answer in his expert analysis of banking fundamentals. HBOS simply outgrew its liabilities in search of more assets until by 2007 it could fund only 50 percent of its new lending with customer deposits. This left it exposed, like Northern Rock, to a downturn in the inter-bank lending market once it became clear write downs on sub-prime securities had spread to other assets. The £82 billion of mortgages HBOS securitised and passed on to other investors in the period 2001 to 2007 came back to haunt them. Though the losses were not on their balance sheet, it caused the wider credit markets to seize up and threatened their day-to-day funding operations.
These should have been the conditions for a classic bank run, but the Bank of England’s £20 billion loan in September 2008 remained a secret and spared HBOS the ignominy of Northern Rock’s experience of people queuing outside the branches to get their money out. Nevertheless, the bank faced £164 billion in maturing loans to rollover on the wholesale markets in the next twelve months. How could it repay these without cutting its own lending operations? Only 9 percent of shareholders took up the bank’s rights issue of £4 billion in July 2008 – investors would be foolish to commit anymore equity after the fallout from Lehman.
Perman also highlights the bank’s exposure to Grampian Funding, an arbitrage investment operation fully owned by HBOS, which held assets up to the value of $36 billion. Investors were happy to buy Grampian’s Asset Backed Commercial Paper (ABCP) at low rates of interest because they knew it could rely on HBOS’s retail deposits if it ran into trouble. Grampian’s appetite for high yields paid for by short-term borrowing saw it accumulate $30 billion worth of Triple A and Alt-A securities in the US secondary markets. At first the transformation between borrowing at low rates and investing in assets with higher yields of interest worked wonders and rewarded the fund with hundreds of millions in profit. But this soon came to an end when inter-bank lending rates shot up in 2007. The higher cost of issuing ABCP left Grampian facing the double nightmare of increased funding costs and falling profits. Indeed, HBOS’s exposure to Grampian is one of the reasons it ended up seeing its spreads in the borrowing markets increase five-fold between June and September 2007.
Of course, no bank goes to the wall without reckless lending and outlandish risk-taking. Halifax is now infamous for extending mortgages to home-buyers at a multiple of five times the borrower’s salary. It was also happy to compete with Northern Rock’s aggressive lending expansion by issuing 125 percent mortgages. This led to the inevitable fall in lending standards associated with the stupidity of this period as banks turned a blind eye to a person’s ability to repay. Everything was sacrificed on the altar of growing the loan book and flattering returns on equity.
The Corporate Banking Division was even more of a basket case. It seems any company or individual involved in the commercial property or construction industry qualified for a loan as late as 2008 when the UK housing market already showed signs of overheating. A third of all lending – up from £35 billion in 2001 to £109 billion in 2007 – went to the property sector and brought the Corporate Banking Division record profits of £2.3 billion at the zenith of the property boom. The fall was just as impressive: a HBOS investment in Retirement Homes Builder, McCarthy & Stone, resulted in a write-down of £1.1 billion on a single asset in 2009, one of the biggest losses of all time in the history of commercial lending.
The fact this happened on the watch of Lord Stevenson, Sir James Crosby and Andy Hornby – all three from the Halifax camp – gives the author an easy opportunity to present this as an English stitch-up that corrupted Scotland’s oldest bank with a heritage stretching back to Europe’s Enlightenment. Perman is at pains to eulogise about the Presbyterian culture at the Bank of Scotland and how it once represented the virtues of prudence and cautious lending that characterise sound finance. On occasions this sounds like a bizarre wish for a return to the days when bankers followed the 3-6-3 rule (borrow at 3 percent; lend at 6 percent; golf course at 3pm) and could look forward to a job for life as respectable citizens of their local communities. Then came the 1980s when Thatcher’s Government abolished exchange controls, allowed building societies to offer cheque accounts and stockbroking services, and gave the go ahead for banks to buy up all manner of insurance companies and brokerages once off limit.
Perman’s hero is Sir Bruce Patullo, appointed Treasurer (CEO) of the Bank of Scotland at age 41 in 1980. This is the man who launched the first electronic banking system in the UK and had the lowest cost-to-income ratio of the era. Only Lloyds had a better record of Return on Equity in the period 1975-1985 and his penultimate year at the helm in 1997 saw him lead the best performing company in the FTSE 100 with the share price rising by an incredible 85 percent.
However, Patullo is also the man who presided over the bank’s continuing reliance on the wholesale lending markets in its quest for relentless growth. The deposit base covered 90 percent of all lending in 1978; this was down to 50 percent by 1985. Perman doesn’t dwell on this long enough to offer criticism, but appears to blame UK savers for the bank’s reliance on the wholesale market. Yes, UK household savings ratios fell from 12 percent in 1995 to 6 percent by 2000. But surely the banks were partly responsible for this trend? Perhaps Patullo was a victim of his own success. McKinsey’s findings presented the dilemma in 1996/97 – the Bank would need to rely more on the wholesale lending market if it wanted to grow at its current pace; this would make it a takeover target. Alternatively, a deliberate slow-down would hurt the share price and put them in play. Bank of Scotland needed a new deposit base and an acquisition to restore its stability.
Though only a sideshow to later events Perman’s summary of Bank of Scotland’s epic battle with RBS for the acquisition of Nat West in 2000 is one of the most exciting chapters of the book and lays bare the reality – Bank of Scotland needed Halifax after the defeat to its arch rival for one of England’s major prizes. There’s no reason why anybody would have seen the Halifax tie-up as a bad merger when one considers that the former building society ‘had deposits coming out of its ears.’
A brief history of Halifax as a Building Society founded in 1853 to its eventual demutualisation into a publically traded bank in 1997 is the one thing missing from this book. The result is an imbalanced assessment of HBOS’s failings and a one-sided portrayal of Halifax as the iconoclast responsible for wrecking Britain’s oldest commercial bank.
Yet Bank of Scotland had long introduced a sales approach at branch level and once boasted how it would give Nat West a dose of upselling targets if successful in its acquisition. The culture at the two banks was not too dissimilar in 2001; Andy Hornby had no problem introducing sales targets learned from his time in the supermarket sector. In reality, Bank of Scotland was well on the way to pushing loans and credit cards on risky customers before it merged with its English counterpart. And let’s not forget Peter Cummings, a Bank of Scotland lifer, ran the Corporate Banking Division that came close to bankrupting Lloyds in 2009 when the full scale of losses at HBOS became known.
To be fair, the author is not ignorant of these minor criticisms and the title of the book gives an indication of which side he’s on in the fall of HBOS. The 243 pages are easy to surmount and written with a level of confidence that matches the author’s talent for articulation. Few books are as good at explaining the rationale behind securitisation as this one; in this case with a summary of the $55 million bond issued by David Bowie in 1997 and bought by the Prudential Insurance Company in the US. This guaranteed investors a steady stream of future royalties from all his hit singles, and Bowie was able to use the proceeds to buy back ownership of his back catalogue from a former manager. Like the Anthropologist and Financial Times journalist, Gillan Tett, Perman has a gift for explaining complex financial products to a wider audience. All readers will come away from this study with an expanded knowledge base.
Ivan Fallon, Iain Martin and Ian Fraser have all published magisterial accounts of the crisis that engulfed Britain’s top banks in 2008/09. Perman’s book is worthy of such company and will stand as the definitive account of HBOS during this critical time in Britain’s recent history. The Bank of Scotland is a classic example of how break-neck growth became unsustainable in the long run without a drastic change, in this case a merger with a solid English institution. But would things have been any different if they, and not RBS, had acquired Nat West in 2000? The evidence suggests the author is all too aware of the dilemma that forces many public companies to pursue increased shareholder value while taking on more risk.
Maybe the Bank of Scotland is not as innocent as we are led to believe.
|Posted on July 12, 2016 at 3:35 PM||comments (675)|
My rating: 4 of 5 stars
Lazard Ltd is one of the most prestigious investment banks in the world, yet one of the least recognisable to the general public. Everybody has an opinion on the dubious nature of corporate- lending institutions that are supposed to oil the wheels of economic growth, yet Lazard Ltd has faced none of the opprobrium its rivals have lived with since September 2008. The chances are you might be learning of its existence for the first time by reading this review.
William D. Cohan’s history of Lazard Freres & Co (the predecessor to the Lazard Ltd now listed on the S&P 500 index) finishes at 2007 and received its first publication just one year before the near-destruction of the American banking system in September 2008. Nevertheless, Lazard must be the only investment bank that does not require an updated chapter on the last eight years to account for the existential threat faced by all other major houses during this time. Its share price trades above $31 as I write this ($10 above its IPO price in May 2005) and has been as high as $58 in the last twelve months. What makes it so special and so mythical in the world of High Finance?
Lazard has always prided itself on its image as the supreme Mergers & Acquisition (M&A) consultancy that offers nothing but the wisdom of its sagacious bankers. It takes no commercial deposits; has no use for transforming liabilities into assets; doesn’t engage in proprietary trading (e.g. using its own capital to bet on commodities and currencies); and has no role in the competitive world of financial derivatives. Besides Asset Management services ($186 billion under management in 2015), Lazard Ltd relies solely on revenue from M&A activity, the sector it has helped to pioneer over the last five decades.
The author, a former Lazard Managing Director, is keen to emphasise the innovative role of the bank over the years and his structure for this book is quite simple – a twentieth century history of High Finance as told through the achievements of its great men. A good number of names have passed through the global offices over the last one hundred years, yet two people stand out in its 150 year-old-heritage – Felix Rohatyn, said by his peers to be the greatest M&A banker of the last sixty years, and Bruce Wasserstein, the CEO that took the firm public in 2005 and made a fortune for himself in the process.
Rohatyn is presented as the resourceful Askenazi Jew who escaped Nazi persecution and found the American dream in the space of a decade. As Wall Street’s original media darling, Felix is all things to all people – cultured, charismatic, driven and socially liberal, yet a nightmare to work with. He also had a role in most US Corporate takeovers between 1965 and 1990, putting him in the same league as John Pierpoint Morgan and other titans of the last two centuries. But Cohan recognises his job is to look beyond the flattery: Rohatyn also comes across as disingenuous during ITT’s hostile bid for Hartford in 1969/70 and we later learn of his reluctance to take up an offer to run the World Bank in 1995 for fear it might be a career dead-end. The chance to become the US Ambassador in France during Clinton’s second administration is also treated with disappointment and scant consolation for not getting the Treasury Secretary position. (He takes it in the end.)
If Rohatyn is not content with being a Master of the Universe, Bruce ‘Bid Em Up’ Wasserstein makes him look modest in comparison. And Cohan is not a fan of the person most synonymous with Wall Street’s excesses of the 1980s, even if he is by far the most interesting of the dramatis personae in the book. No description of Bruce is complete without the word ‘genius’ and ‘shameless’ in the same sentence, whether it’s his New York Times Obituary in 2009, the many portraits of him in Fortune Magazine or in Cohan’s reluctant praise. It’s also in his micro-analysis of Wasserstein that we get to some of the fundamental questions about investment banking (not to be confused with trading).
Though, it takes over 500 pages to ask why M&A bankers get paid so much and with no consequences when their advice leads to bankruptcy, Wasserstein encapsulates the ‘take the fee and move on' mentality that underpins the industry. After all, this is the man who planned Texaco’s disruptive bid to stop Pennzoil from buying Getty Oil for $9 billion in 1984 with a counter offer of $10 billion. Part of the strategy was to extricate Getty from its initial agreement by convincing Texaco to indemnify Pennzoil for any legal fallout from breaking up the Pennzoil-Getty deal. Three years later Texaco received an $11.1 billion bill from the Supreme Court and filed for bankruptcy. Bruce pocketed his fee and moved on to the next deal as if nothing happened. Cohan insists that Wasserstein’s excuse that nobody forced the client to take his advice ‘is surely the last refuge of a scoundrel.’ That this man could take over Lazard with so many enemies on Wall Street is puzzling to the author. ‘Yet thanks to an unlikely confluence of events that could only have happened to Bruce Wasserstein, here he was, as of January 2002, in charge of Lazard and its second-largest individual shareholder.’
But Lazard is not just an American icon. For most of the late nineteenth century up to World War Two, New York played second fiddle to Paris and London. No bank other than JP Morgan had a more global reach in the inter-war years, and few were as revered. From the bank’s brilliant advice to fight the French currency crisis of 1924 with a classic ‘short squeeze’ to London’s secret bail-out by the Bank of England in 1931 following the actions of a rogue trader, the two European houses have a fascinating history of their own. Yet Cohan abandons his interest in the European operations once the great Andre Meyer escapes the Nazis and arrives in the US to take over New York from Frank Altschule. For the rest of the book they are but an occasional footnote in the story of Felix Rohatyn and Steve Rattner and the evolution of M&A banking on Wall Street in the post-war years.
Fortunately, no story of tremendous wealth, opulent tastes, high society and ground-breaking advances in corporate baking is complete without a pompous autocrat who can say with a straight-face, “Beware of self-made men.” Here is the cue for Michel David-Weill, the billionaire despot, to take centre-stage for one-third of the book. As a blood relative of the founding Lazard brothers, Michel is everything you’d expect from a French Jew – desperate to cling to an ideal of aristocracy that ended in the eighteenth-century when his ancestors were still confined to ghettoes. He wiles away his time from the 1970s to the early 2000s amassing one of the world’s most impressive art collections, pursuing mistresses, cultivating the press and pretending to be philosophical. Though an unwitting consequence of Cohan’s portrayal, you cannot help but despise a man who never closes any M&A deals, but holds the purse strings for the year-end bonuses like a slave-master seeking recognition from his chattel. Only a man as pampered and rich as Michel could look back on his escape from Nazi-Europe and say, “Frankly, I had no idea I was Jewish… I learned I was Jewish because of the war.” Somehow, I can’t imagine the more modest (and famous) Rothschild family being so trivial or iconoclastic about their racial heritage. A more capricious or whimsical dynast is unimaginable, but caricaturists will enjoy reading about him.
With other works behind him since writing The Last Tycoons, Cohan is now a master in his field and on par with Michael Lewis as one of the best historians of modern finance. But, unlike Lewis, he prefers the epic survey texts that explore the evolution of today’s Wall Street through the prism of the last 150 years. This is a notable exception to the tendency to focus everything in the post-Bretton Woods era and provides welcome relief to the short-sighted narratives dominating the current bookshelves.
Yes, the Last Tycoons is a big undertaking, not least because it comes in at over 650 pages. But don’t let that put you off. This is better than Cohan’s 2009 history of Goldman Sachs and is not bogged down with complicated interpretations of how Wall Street’s near-collapse symbolises our present age.
One hopes the onward march of Finance & Banking History will take another step in its quest to achieve a foothold in mainstream academia with this book. And why can’t Cohan make it the next big thing in university departments preoccupied with Gender History and Post-Modernism?
A genealogy of Citigroup’s origins in banking and insurance would make a good project for his next work.
Review of Fool's Gold: How Unrestrained Greed Corrupted A Dream, Shattered Global Markets And Unleashed A Catastrophe by Gillian Tett
|Posted on July 4, 2016 at 8:00 PM||comments (204)|
My rating: 4 of 5 stars
British voters paid little attention to Jamie Dimon’s threat to relocate 4,000 JP Morgan jobs from London in the event of Brexit. But underneath the small print they might have missed the real concern – the world’s most prestigious bank relies on its London offshoot to nurture its Derivatives operations. In reality, England’s capital has been a welcome centre for American retail banks hoping to blur the lines between commercial and investment banking for the last five decades. Will that now change?
Gillian Tett’s story of how a team of innovative bankers at JP Morgan designed today’s Credit Default Swap (CDS) as a means of revolutionising finance and freeing up capital for other lending projects is a well-rehearsed tale that applies to all areas of science and industry. A passionate clique of idealists put their creative talents to use thinking up ways to make the world more productive. Building on the work of other pioneers, they have an idea: what if you can securitise the one thing banks most fear – the potential loan defaulter who forces you to keep capital reserves locked in a vault doing nothing? A concept is born, but much like the inventors of Zyklon B who saw their creation misused by the Nazis, so we have a similar situation with enlightened research applied by unenlightened practitioners. The end result is hubris and eventual catastrophe.
Though a contender for the most ridiculous sub-title in the post-2008 genre of crisis studies, Fool’s Gold may well be the first work to define the complexities of Derivatives in an intelligible language. As Tett explains, these financial products ‘provide a way for investors to either protect themselves, for example, against a possible negative future price swing, or to make high-stakes bets on price swings for what might be huge payoffs.’ She then goes on to give basic examples of Forward Contracts, Options and Swaps and furnishes us with a brief history of Derivatives from the establishment of the Chicago Board of Trade in 1849 to the ground-breaking currency Swap between IBM and the World Bank brokered by Salomon Brothers in 1981. A survey of this magnitude is no mean achievement, especially when condensed to less than ten pages.
Often, the finest books beg you to read one more paragraph until your eyes can no longer take the strain – Fool’s Gold is one of those works. Throughout these 313 pages, Tett’s writing is fused with prescient observation and a unique ability to explain opaque concepts to a wider audience – you want more. Her academic training as a Social Anthropologist may well be a blessing (though unusual for a financial journalist), but her grasp of history is just as important. A seminal event for her is JP Morgan’s 1994 CDS deal with Exxon Mobil and the European Bank of Reconstruction and Development (EBRD). British financier, Blythe Masters, gets the credit for achieving two complimentary goals with this landmark CDS by reducing capital holdings on her bank’s balance sheet and paying a third party to insure against a loan default.
From a modern perspective this is a moment that changed the world of Finance. Even today Exxon Mobil is the least likely candidate (other than Apple) to default on a credit line of $4.8 billion, and is the very definition of a triple-A asset. Why keep so much capital tied up when you can pay a third-party (EBRD) an annual fee to assume full liability in the event of default? JP Morgan can reduce their equity reserves, Exxon Mobil get their credit line and the EBRD earns an annual fee for keeping an ultra-safe asset on its books. Everything about this deal made sense: the EBRD was forbidden from investing in risky assets and was looking for a higher yield outside its usual portfolio of sovereign bonds; JP Morgan could maintain its loyalty to its client, Exxon Mobil, by not selling the loan to another party.
The term ‘Financial Engineering’ is now used scathingly and often substitutes for the word ‘alchemy’ when describing the sinister machinations of high finance, but it wasn’t always this way. The trouble begins when everyone catches on and applies a good idea to inappropriate concepts. As the JP Morgan team were later to realise – credit derivatives are not the problem, it’s the people that package them. Underwriting CDS contracts for bundles of mortgages containing both Triple-A and Subprime assets is the opposite of what Blythe Masters had in mind in 1994, but AIG took the idea to its logical conclusion and never imagined how this could bring them to the brink of bankruptcy twenty years later.
But Tett is not just content with writing a narrative of events. Like any academic she wants to know why things happened as they did. How did the US Federal Reserve and Bank of England allow OTC Derivatives to evolve into the financial WMDs that brought the world economy to its knees in 2008? What about the nature of financial innovation, where an idea is quickly imitated by competitors and margins are driven down as more participants flood the market? Is ‘creative destruction’ the engine that underpins the next crisis by forcing banks to adopt an ‘innovate or die’ mentality? Against this backdrop the author introduces every CEO’s nightmare – the hostile takeover bid from a rival bank, or, even worse, defenestration by disillusioned shareholders.
In keeping with every account of the 2007-08 banking crisis, Fool’s Gold is also not alone in highlighting JP Morgan CEO, Jamie Dimon, as a special talent on Wall Street. As in Andrew Ross Sorkin’s Too Big to Fail (2009), Dimon is portrayed as a boss with an unusual command of his brief, even to the point of challenging his traders and quants with poignant questions they would never expect from someone so high up. It may not be sycophantic, but Tett is gushing in her praise for the Rock Star of modern banking: ‘The JP Morgan Chase staff would have reason to be grateful that Dimon had arrived on the scene, and held true to his principles of risk management, even as most of the rest of the banking world broke free from all bounds of rational discipline,’ we are told. To be fair, the same might be said about Lloyd Blankfein of Goldman Sachs, but the world’s most envied (and hated) investment bank traded their way out of the Subprime mess in early 2007 by betting against the market with its own capital. Though not as glamorous, JP Morgan simply tightened its mortgage-lending criteria and didn’t ramp up its CDO trading desks when others were in overdrive, but it still took big hits on its balance sheet.
Many assumptions about the western financial system have collapsed since the fall of Lehman Brothers. The timeline of events from BNP Paribas’ decision to suspend three money market funds in August 2007 to Northern Rock’s nationalisation the following February are now considered seminal moments in the crisis. However, Tett prefers to use the collapse of US Investment Bank, Bear Stearns, in March 2008 as the climax to her book, seeing in this one event the first real sign that ‘unrestrained greed corrupted a dream, shattered global markets and unleashed a catastrophe.’
JP Morgan may have created the conditions for bringing CDS contracts into the mainstream, but the world of credit derivatives that grew out of it, including the proliferation of Collaterised Debt Obligations and other mortgage-backed securities, will always be remembered as a collective folly unsurpassed in the world of finance since 1929. But whether the house of Pierpoint Morgan should be off the hook is another question, and Tett is ambivalent enough to keep us guessing.
What we are left with is a superb account of how banking became an insular, proprietary pastime where the people supposed to be oiling the wheels of finance forgot about infrastructure projects and building factories. But, as Tett shows, the intentions behind that famous 1994 CDS deal had the fundamentals of banking at heart, namely how to release more capital to build the things we need to prosper as a civilisation.
How tragic that collecting easy fees and repackaging risk became an end in itself instead of the means to a better future. As Iain Fraser notes when quoting a banker in his seminal study of what went wrong at RBS: ‘We are investment bankers. We don’t care what happens in five years.'
|Posted on June 10, 2016 at 6:35 PM||comments (0)|
My rating: 4 of 5 stars
The 2008/09 global credit crunch has created a boom in books about High Finance. Making ‘money out of money’ fascinates and infuriates us and often reaches a peak of interest following the downturn of the business cycle. Indeed, those millionaires that got rich speculating on commodities and share prices once basked in the glory of being a stabilising influence on the world economy. Then came the 2007 sub-prime crisis, the Lehman Brothers collapse of 2008 and the 2009 recession. For one brief summer graduates in Engineering, Astro-Physics and Mathematics decided a career on Wall Street might not be their destiny.
Skip forward seven years and things are back to normal. The brightest and best seek their fortune in the City and hope to get rich speculating on various price movements in the market. What has gone wrong with the Financial Sector and what does it say about our society?
John Kay tries to answer these questions and is on a mission to challenge some of the assumptions we have about the role of Finance in the aftermath of the last economic meltdown. On the whole, his analysis is successful and enlightening.
The author’s first priority is to describe how Investment Banking has moved so far away from its original purpose of providing capital for infrastructure and industrial growth. Take Goldman Sachs where underwriting debt and new equity for companies represents less than 10 percent of the bank’s net revenue. In other words, 90 percent of Goldman’s earnings are from Fixed Income, Currencies & Commodities (FICC) trading. This begs the obvious question: how useful is this to society?
But perhaps Kay’s most poignant observation is that a lot of global businesses today need not list on the stock market to fund expansion. As he points out, Exxon Mobil invested $20 billion on infrastructure and exploration projects in 2013, all from its own resources. In the same year the company spent $16 billion buying back its own shares and paid out $20 billion in capital. In total, Exxon Mobil has spent around $100 billion in the last ten years repurchasing securities it previously issued.
So why do companies list on the stock market if they don’t need capital? According to Kay, the nature of today’s companies are so much different to the railways and breweries that used to pursue capital-raising projects in the early twentieth century. And the facts don’t lie: operating assets make up little of the capital-intensive activities of modern enterprises such as Apple (only 3 percent). Instead, reputation, human capital and brand prestige are just as important to tech companies as plant maintenance and making the most of productive capacity. In reality, they undertake IPOs to realise value for early investors.
‘Stock markets are not a way of putting money into companies, but a means of taking it out,’ insists Kay in the iconoclastic style that characterises his writing. To be fair, he has a point: forty members of Apple became overnight millionaires when the company listed in the late 1980s. Today’s giants are similar: Google and Facebook were generators of cash early on and don’t need to raise billions to build new plant and develop infrastructure like the industrial behemoths at the turn of the twentieth century. Facebook’s ambivalent 2012 IPO prospectus more or less admitted the Board had no specific plans for the money raised on the Nasdaq.
If Main Street has been lagging behind Wall Street, the former now have a tutor in Kay. More statistics and observations follow like a swarm of bees hoping to sting you out of your ignorance. Why did Apple raise $17 billion in a bond offering in 2013 to pay a dividend? Did they need the money? No, but repatriating the cash from foreign jurisdictions would have incurred unfavourable taxes in the US.
Next in the firing line is our obsession with emulating Silicon Valley. Why do the Anglo-Saxon nations not cast an eye at the German Mittelstand for inspiration? The Stock Market value of German companies is only 40% of national income; the figure is over 100% in the US and UK. Yet Kay sees the grubby influence of Canary Wharf and Wall Street on this last bastion of productive capitalism as a defining battle for the future of Finance. Global investment banks have been trying to develop Germany’s capital markets in debt and equity for the last 30 years and may one day corrupt the nation’s world class family enterprises at the centre of its economy. Though the alchemists have had little success so far, the European Commission seems to be on the side of Goldman Sachs rather than the industrious pioneers and producers of the German heartlands.
Thankfully, the Mittelstand have shown scant interest in listing on the stock exchange and are more than capable of funding expansion through their own internal resources. Successive generations of family ownership and professional management are the key to their success. The author’s admiration for this unique producer class is clear: ‘In Britain and the USA successful medium-size businesses grow by acquisition or are themselves acquired. But this ‘hollowing out’ of the middle of the size distribution of companies has not occurred in Germany.’ (P.171) Expect Kay to write the epitaph if the vultures get their way.
If the Mittelstand represent an ideal of capitalism, the growth of Limited Liability companies mark one of its aberrations. Here we get the usual excoriations against Sandy Weil’s Citigroup and predictions that Salomon Brothers and Lehman Brothers might still be around if they’d retained their Partnership structure with their own capital on the line. The cue to rally against the demutualisation of British Building Societies is not without merit, but the author’s main criticism is how too many CEOs now prioritise their share-price above all other concerns. Hey, it’s not their money, so why not take bigger risks for the potential of huge gains?
The rise of Mark-to-Market pricing since the late 1980s has also helped the modern PLC create the illusion of wealth. Once a supporter of this valuation, Kay now admits that marking assets at full value of what they are likely to earn before their maturity is an easy way of inflating earnings and generating bonuses for senior staff. Geoff Skilling’s success in getting the SEC to authorise Enron to trade gas contracts allowed him to take advantage of this accounting method and book the full P&L in the present rather than as a steady stream of income over a longer period. Bear Stearns, Lehman Brothers, HBOS and RBS succumbed to the same temptation.
One final argument in this book that will get attention is the author’s assessment the Financial Sector has too much regulation, not too little. This is the most contentious part of the whole study and the least articulate of Kay’s judgements. Numerous pages are devoted to lamenting the evils of ‘Regulatory Capture,’ but the reader may still wonder what this means, other than an ill-defined advantage today’s lobbyists have over regulators.
Fortunately, Kay’s analysis of ‘Regulatory Arbitrage’ is far more intelligible. What do the growth of London’s Eurodollar market of the 1960s and the Credit Default Swap of modern times have in common? Answer: They both evolved as a way of circumventing the law. The former, known as Regulation Q, is a good example of unintended consequences. Government intervention after the Great Depression put a limit on the level of interest US Banks could offer depositors; capital reserve requirements were also high. But money lent to American banks from European institutions escaped the provisions; therefore, the former could recycle funds via Britain to get round the rules. Result: US banks found a way to pay higher interest on deposits and London banks enjoyed renting out their services for a commission. Alas, the Eurodollar market emerged thanks to a regulatory loophole.
It’s easy to see why Other People’s Money made the Longlist for the 2016 Orwell Prize. The author is an Economist with a gift for explaining complex subjects and making Banking & Finance accessible to a wide audience. However, a tendency to pre-warn the reader certain topics will be covered in more depth in later chapters can be repetitive (and confusing) and Kay, like many others, does not offer a convincing definition of Derivatives. This is a shame because he should excel at describing a ‘Put’ option on a Forward Contract or articulating the intricacies of an Interest Rate Swap. (Topics that still baffle me.)
The ‘Financialisation’ of our society may be irreversible unless western civilisation lapses into war, but until then today’s Science Graduates may continue to deprive us of their productive skills to trade commodities instead. The end of ‘Casino Banking’ is nowhere in sight, but stopping Investment Banks using deposits from their Retail operations is the first of many changes that need to happen if we are to prevent another crash. Like John Plender, Sir Mervyn King and Alex Brummer, the author is keen to add his name to the list of prophets lamenting the inevitability of the next crisis.
|Posted on May 25, 2016 at 7:30 PM||comments (0)|
My rating: 4 of 5 stars
If History is written by winners, then memories are also biased towards its survivors. In a hundred years from now, Bear Stearns, Merrill Lynch, Washington Mutual and Wachovia will cease to exist in the footnotes to the history of the 2008 banking crisis. Instead, people will remember Goldman Sachs as the bank that profited while other Wall Street titans perished. Indeed, the evidence eight years after the near-implosion of western capitalism suggests the process has already begun. So why does the most successful and envied investment bank of all time have an image problem?
William D. Cohan tries to answer this unique question while not forgetting this is an unusual conundrum for one of the most consistent winners over the last one hundred years. The toughest, smartest and most successful agents of history are often remembered with fondness, yet Goldman appears to be the exception.
A chronicle of any financial institution will have its ups and downs, but Goldman Sachs has a knack for getting under the skin of the SEC. As Cohan shows throughout the 610 pages of his excellent study, this process has been ongoing since 1947, when Goldman Sachs (along with sixteen other investment banks), came under investigation in an Anti-Trust Lawsuit. Allegations of maintaining a closed shop to new entrants and infiltrating the boards of America’s biggest industrial companies caught the public imagination, but resulted in no fines or reprimands. Nonetheless, people were less forgiving in 1970 when the firm encountered its first existential crisis since the Great Depression as the lead underwriter of Penn Central’s default on $87 million worth of commercial paper. A $23 million federal lawsuit from embittered investors could have been the end, but is the best example of how Goldman claimed no responsibility for wider events beyond their control and escaped the worst of it.
Numerous examples of this instinct to dump losses on investors crop up time and again and make depressing reading throughout the book. This is not exceptional behaviour and is widespread across the finance sector, even to the point where people accept banks will always put their own interests above the customer. But from its inception Goldman Sachs has been different. Ever since John Whitehead instituted a 14-point Code of Conduct in the 1960s, the bank has been indoctrinating its staff in the wisdom of being client-focused and remembering that ‘our assets are our people, capital and reputation.’ This may sound good on paper and there’s no doubt Goldman’s loyal employees believe in the rhetoric, but Cohan shows this to be an honourable yet unachievable aim. In reality, Goldman Sachs is like all other banks – they will never pass up an opportunity to make a quick buck, even when it’s unethical to do so.
The list of misdemeanours in the last four decades is too extensive for the holier-than-though delusion to continue, and it’s easy for the reader to lose perspective and get caught up in the excesses. Goldman’s dubious behaviour during the Dot.com bubble in the early twenty-first century can be seen a microcosm of what is wrong with investment banking these days. Allegations of ‘spinning’ (selling hot IPO stock offerings to 21 of the bank’s most profitable fee-paying CEOs) and ‘laddering’ (favouring investors with sought-after Dot.com stock on the condition they agree to buy more block shares on the first day) are symptomatic of the tendency to act like a cartel. But the alleged existence of a ‘good behaviour’ list of hedge funds and wealthy investors that had access to the over-subscribed Dot-com stocks in return for attending Goldman roadshows and paying various commissions leads Cohan to an even more alarming thought. Did Goldman Sachs help to push up the IPO stock prices and contribute to the Dot.com crash? The $40 million settlement with the SEC in 2005 for charges of laddering does nothing to assuage the guilt, neither does the $110 million fine Goldman Sachs paid for allowing its investment banking division to influence the firm’s research analysts’ views on lucrative IPO prospects during the Dot.com boom.
Amongst this litany of sins it would be easy to forget the individuals that created and turned this mammoth bank into the giant of today. Fortunately, Cohan remembers his duty as a historian is to the academic, not the polemic, and furnishes the reader with extensive biographies of the firm’s legendary leaders. And like all powerful institutions with an impressive heritage, Goldman Sachs has its pantheon of heroes and iconic figures that loom large over each generation – none more so than Sydney Weinberg and Gus Levy. The former is the ultimate example of meritocracy, the ex-porter who became Senior Partner three decades later and earned Franklin Roosevelt’s trust as the most important voice on Wall Street. Levy is portrayed as the most innovative arbitrageur of his era, dragging Goldman Sachs into the cut-throat world of Proprietary Trading in the 1960s and away from the gentleman’s club of underwriting IPOs and company bonds. And of course there’s the diligent and entrepreneurial Marcus Goldman, the firm’s founder who started the business in 1869 buying up discounted commercial paper and pocketing the difference at the maturity date. His son, Henry Goldman, is credited with turning the bank into a force to be reckoned with on the eve of the First World War only to be ostracised for his pro-German views.
Cohan’s writing achieves its most vivid style in these biographical interludes; the big-screen is on his mind and penetrates the reader’s imagination. But perhaps the most intriguing person throughout the book is Hank Paulson, one of the few non-Jewish leaders of the firm before he took up George W. Bush’s offer to become Treasury Secretary in 2006. Cohan paints an image of a man who never doubted his ability, but sometimes questioned his own ambitions to become leader. As the most successful Investment Banker in Goldman’s Chicago office, Paulson had little knowledge of the trading desk, but few equals in the world of Mergers & Acquisitions (M&A). The Machiavellian way he ousted John Corzine (the joint successor to Steve Friedman in 1994) is as intriguing as his success in building diplomatic relations with China. This last point is something Barack Obama might regret in his haste to put distance between the White House and Goldman Sachs; no other American is as well-connected and influential in the Sino sphere as Hank Paulson. Comparisons with the British East India Company’s reach in South Asia in the eighteenth century are striking, but Cohan chooses not to join the dots for fear of succumbing to the ‘giant vampire squid’ stereotype immortalised in the July 2009 issue of Rolling Stone.
Though a dispassionate account is impossible (and unmarketable), one gets the impression Cohan is trying to counter the scandal and controversy by looking away from the noise and into other areas where Goldman Sachs has escaped opprobrium. For instance, he is explicit the firm should take more blame for the firestorm that raged in the mortgage-backed security market in 2007 when it marked down estimates of the securities on its balance sheet. Goldman knew this would have a negative impact on the averages reported by other investment houses and its decision to mark its securities at 50 cents to the dollar in May 2007 when other firms were reporting no lower than 98 cents played a direct role in bringing down Bear Stearns and capsizing the entire finance sector. But why doesn’t the author have the courage to accuse Goldman of crashing the market to benefit its huge short positions against the US housing market? It’s one thing to blame the institution that brought the madness to an end, but is it criminal to give an honest assessment of the securities on your balance sheet when every other bank is stewing in false optimism and financial neurosis?
Another instance of Cohan’s admirable but gung-ho narrative is the $550 million fine Goldman paid in 2010 for misleading investors in its controversial Synthetic CDO offering of 2007. After a whole chapter of extraordinary email correspondence and implications of clear mendacity in selling products that are designed to fail, the author devotes only one paragraph to the recklessness of the Goldman customers that betted on the continued strength of the US housing market. And it turns out Goldman did not lie and reassure investors Hedge Fund Manager, John Paulson, was taking the long-side of its ABACUS CDOs even though they knew he was doing the exact opposite. Yet this is buried amongst the moral outrage and obscured by John Paulson’s subsequent profit of $1 billion on the greatest short-selling bet ever placed.
The fact Goldman earned a net profit of $11.4 billion in 2007 and offset its losses on writing down mortgage-backed securities with a $4 billion profit on its own short position is the real reason the US Government, the SEC and the ‘99 percent’ aimed their anger at the bank. Here is the only Wall Street institution that profited while others took their eye off the ball and allowed their superficial Return on Equity mark-ups to give the illusion of lucrative earnings. Indeed, one comes away marvelling at the efficacy of Goldman’s Risk Management culture and its super-efficient decision-making procedures. You might even acknowledge the bank’s plucky decision to disassociate itself from the herd if it wasn’t so complicit in blurring the lines of insider trading.
In its present structure, Goldman Sachs is a financial powerhouse like no other bank in modern history. Cohan does a good job of explaining this evolution and highlights the dangers Goldman might encounter in the near future. Their disruption of Société Générale’s $17 billion bid for Paribas Banque in February 1999 is a telling illustration of their unhealthy market dominance. Enraged at being left out of the advisory team preparing the bid, Goldman spearheaded BNP’s successful counter-offer in May 2000. Though not illegal or even frowned upon in the industry, it’s astonishing that Goldman was allowed to continue as the lead consultant reviewing Société Générale’s investment banking business and strategic initiatives while playing for the other side. The message was clear then and still rings true today: leave us out of a lucrative Acquisition and we will lead your rivals in a counter-bid. A more crude analogy is allowing a servant to cook your dinner and then eat it off your wife’s porcelain plate.
Much is made of the ‘Chinese Walls’ that keep the conflicting interests apart at Goldman Sachs, but the worry is the M&A bankers advising on company takeovers may abuse their access to confidential information and pass it to their own Trading Department. This is not ‘God’s Work’ but insider trading.
As Cohan states one two occasions in this book, no financial company has ever survived a criminal indictment. And though hard to envisage due to its profitability and influence on governments around the world, this might come to haunt Goldman Sachs one day.
|Posted on May 15, 2016 at 3:30 AM||comments (6160)|
My rating: 4 of 5 stars
Other than Lehman Brothers, RBS is the most notorious example of hubris leading up to the 2008/09 banking meltdown. Its market capitalisation stood at £76 billion in May 2007 – more than every other listed Scottish firm put together – and the bank employed up to 200,000 people worldwide. By October 2008 it was worth only £16 billion and on the verge of collapse, relying on taxpayer support to keep it solvent.
CEO Fred Goodwin emerged from this mess as ‘the unacceptable face of capitalism’ and is the nearest thing this generation has to a James Bond-esque villain. Only last week the Scottish Crown Office announced ‘Fred the Shred’ and his fellow cronies will not face prosecution for misleading investors over a £12 billion rights issue in 2008, despite a five-year review and trawling through 160,000 documents. It seems RBS and its disgraced former-Emperor cannot stay out of the news for all the wrong reasons.
Ian Fraser’s epic inside story relies on up to 120 current and former employees of RBS, most of whom prefer to remain anonymous. But the biggest scoop is the author’s access to Sir George Matthewson (former CEO and Chairman who nominated Goodwin as his successor) and Iain Robertson (Non-Executive Chairman of the Corporate Banking & Financial Markets Division). This leaves Fraser with no shortage of rich accounts from the protagonists present during the crisis and, indeed, those that helped ferment it.
Fred Goodwin’s fall from grace should already be familiar to anyone with a passing interest in current affairs and an awareness of tabloid headlines over the last eight years. Fraser doesn’t dwell on the excesses, but reminds us that Fred spent a distasteful £18 million on Corporate Jets; employed his sporting heroes Jackie Stewart and Jack Nicklaus as £3 million-a-year Global Ambassadors; had fresh fruit flown in daily from Paris; obsessed over the colour of the bank’s carpets; and lavished $500 million on the RBS Connecticut HQ at the height of his powers. The author is not the first to suggest the man at the helm from 2000 to 2008 was an unapproachable megalomaniac, but at the heart of this book is a determination to uncover those conditions that allowed profligacy and recklessness to permeate a once-trusted and respected institution.
A whole chapter dedicated to RBS’s famous takeover battle with Bank of Scotland for Nat West in 1999/2000 is a welcome context to subsequent events, and Fraser is keen to remind us how Goodwin’s role in this would later become a Harvard Business School case study in successful integration. It also earned Goodwin the Forbes Global Businessman of the Year for 2002 and the admiration of New Labour and the Prince of Wales. So the Shred wasn’t born with a silver spoon and didn’t acquire an army of sycophants without demonstrating his Midas Touch during his early days. But it convinced him more acquisitions would keep the share-price rising, ending with the fateful decision to buy ABN Amro in 2007.
In total RBS made 27 acquisitions on his watch, most of them a vain attempt to take on Goldman Sachs, JP Morgan and Morgan Stanley in their own backyard. By 2006 the bank’s American subsidiary, RBS Greenwich Capital, had become the second biggest issuer of sub-prime securities worth $99.3 billion (behind only Lehman Brothers). Fraser unearths quotes from Goodwin on 1st March and 5th June 2007 stating RBS did not get involved in sub-prime lending, even though he must have known by November that year just how much exposure the bank had to a weakening US housing market. Was this disingenuousness, denial or deception?
One of the obvious lessons from the crisis is that the regulatory authorities should have done more to prevent a bank like RBS getting out control. The bank’s adherence to the International Financial Reporting Standards (FRS) method of accounting helped it hide up to £32 billion of shaky assets, allowing poor-performing loans to go unreported. Likewise, the Clinton administration’s passage of the Commodity Futures Modernization Act – which banned the Securities and Exchange Commission from regulating derivatives – created the conditions for casino banking to flourish. The arch-capitalist Democratic President also loosened the Glass-Steagall Act of 1933 that had been in place to separate Retail and Investment banking. Even the most trusted central banker of modern times, Alan Greenspan, must rue his decision to lower interest rates from 6.5 percent to 1 percent in the immediate aftermath of 9/11.
But RBS, despite its global pretensions, remained a Scottish bank to the core and reaped the benefits of Margaret Thatcher’s ‘Big Bang’ in 1986. This remains one of the most ambitious bonfires of regulation in the history of modern capitalism and led to an orgy of mergers and acquisitions following the dismantling of exchange controls. Goodwin and RBS were one of many beneficiaries of the ‘light touch’ regulation continued by Blair and Brown in the late 1990s and early 2000s. Once again Fraser produces an impressive array of quotes from New Labour’s leaders praising the minimum supervisory role of the FSA. The bonanza of Corporation Tax produced by financial taxes represented 13.4 percent of the entire take in 2007 (£67.8 billion) – no wonder Gordon Brown claimed his Cabinet had abolished the boom and bust cycle.
In essence the tale of RBS is a depressing story of arrogance and myopia where institutional investors did nothing to hold the bank to account. As a listed company, RBS came to be dominated by a smaller pool of shareholders with ever larger stakes. The pressure to increase Returns on Equity, pay higher dividends and boost the share-price granted power to short-term over long-term interests. Goodwin feared his bank would be ‘in play’ as a takeover target if it did not go along with an aggressive expansion. As Fraser points out, an astonishing 94.5 percent of shareholders voted for the disastrous €71.1 billion acquisition of ABN Amro in August 2007 as part of a consortium with Santander and Fortis. Surely this now ranks as one of the most insane decisions taken by a listed company in the last four hundred years.
Shredded: Inside RBS has won prestigious accolades from Bloomberg, the Huffington Post and The Week, but Goodman Sachs must be relieved they no longer sponsor the FT Business Book of the Year, for which this made the longlist. Their scandalous handling of the RBS £12 billion rights issue in October 2008 leaves them with little integrity. Indeed, Fraser reveals how Goldman passed on shares it was under-writing to a group of hedge funds intent on short-selling RBS. Critics believe this outrageous disloyalty might even have contributed to the share price dropping below 200p. The mere chance it could have put the whole rights issue in jeopardy shows a breath-taking betrayal of trust from the world’s most famous investment bank and is one of many revelations Fraser uncovers in his monumental study. Former RBS Economist, Alex Salmond, is also quoted in a sycophantic letter to Goodwin praising the globe-trotting success of the bank and its importance to Scotland’s economic identity.
At 608 pages, Fraser has left us with a gripping account of the bank that nearly blew up the British economy. And eight years later RBS is still a noose around the taxpayer’s neck. A Moneywise survey in 2015 named it the least trusted bank in the UK due to its appalling customer service and complaint-handling. Numerous lawsuits remain outstanding from manipulation of LIBOR and rigging the foreign exchange markets to the scandalous behaviour of its Global Restructuring Group, where thousands of small businesses allege the bank pushed them into bankruptcy to buy up their assets on the cheap for future profit.
The sad truth is Britain would be better off without RBS, but its sheer size makes it too important to fail. Ian Fraser is in no mood to temper the moral outrage, but perhaps glosses over some of the bank’s early successes during the Millennium. In that regard Shredded: Inside RBS is the right book at the right time for our epoch and is guaranteed a long print run. Aside from the poor taste of the cover artwork and populist title, this is a serious piece of work aimed at both the aggrieved taxpayer and FT reader.
|Posted on May 11, 2016 at 1:20 PM||comments (191)|
My rating: 5 of 5 stars
Lloyds TSB was the third biggest bank in the world with a market capitalisation of €34 billion in 1996. The mighty Citibank, Barclays and Bank of America were only two-thirds its size, and for a brief spell in 1998 it had the honour of being the biggest banking house in the world. Skip forward ten years to 2006 and Lloyds had slipped to number five in the UK, sixteen in Europe and out of the world top twenty. Barclays, RBS and HBOS looked set to leave it behind in their quest for global growth while Lloyds was reaping 94 percent of its profits from the UK domestic market. City analysts, restless shareholders and yield-hungry investors could be forgiven for seeing it as the most boring and conservative of Britain’s ‘Big Five.’ So how did it end up being 43 percent owned by the UK taxpayer and earning the opprobrium of Her Majesty’s citizens?
Ivan Fallon does a splendid job of chronicling the dark days of October 2008 when the UK Treasury helped to broker a deal that had been off the table for the previous five years. Lloyds had a merger with HBOS at the top of its wish-list prior to the banking meltdown of September 2008, but did not expect the Competition Commission to approve an integration. It had mauled the bank in public and prevented a hostile £19 billion acquisition of Abbey National in 2001. A merger between Lloyds and HBOS would not have happened unless the entire banking system threatened to implode.
Story has it Gordon Brown approached the Lloyds Chairman, Victor Blank, at a Citigroup cocktail party the day after Lehman went bust, giving him an implicit nod to buy up HBOS before it suffered the same fate. Though not as simple as this, not one person in the Labour Government, Bank of England, FSA or in the City thought it a bad deal at the time. In some quarters Blank and Lloyds CEO, Eric Daniels, received praise as saviours of the UK banking industry.
This helps Fallon put a much-needed perspective on Lloyds during this period of crisis, and he’s right to correct perceptions this famous banking house was an accident waiting to happen. Aside from the colossal write-downs and collapsing share-prices of all major banks in 2008-09, Lloyds did a good job of resisting the casino banking and reckless proprietary trading of the fat-cat years. The sweeping history of legendary CEO Brian Pitman is a case in point: under his leadership between 1983 and 1997 Lloyds closed its US and Latin American banking operations and pioneered the modern day ‘Banc assurance’ model that now dominates UK high street banking. Everything from outsourcing call centres to India, cross-selling insurance products to current account holders, targeted mortgage brokering, and commission-based KPIs for retail staff helped Lloyds extract huge profits from the UK market. Few businesses succeed by turning their back on the wider world because it offends the instincts of free-market capitalism. Yet Lloyds increased returns on equity by up to 40 percent in Pitman’s last year, a figure rarely seen in the industry these days.
The main thing the reader comes away with after finishing this book is the sheer scale of the crisis that engulfed the western world. On the day of Victor Blank’s private chat with Gordon Brown at the Citigroup reception America had four global Investment Banks on Wall Street; two days later only Goldman Sachs and Morgan Stanley remained. AIG needed a $90 billion bailout to survive and the HBOS share price had lost a monumental 18 percent in the space of hours. The word ‘Armageddon’ is mentioned too often to describe catastrophic world events, but is not exaggerated here.
Daniels and Blank thought they had the deal of the century, but did not count on the merger being forced through at a shotgun pace for political as well as economic reasons. Daniels in particular believes the Treasury stigmatized Lloyds as one of the irresponsible banks in need of recapitalisation, even though Barclays got permission to raise £7 billion from private sources (mainly the Qatar Government) and did not have to participate in Alistair Darling’s bailout deal in October 2008. In Fallon’s view, the ‘no support without capitalisation’ offer from the government allowed too many exceptions, unlike the US Treasury’s determination to force all major banks to take capital regardless of their health. Yet even this was not enough to mitigate the losses from the HBOS loan book: by February 2009 Lloyds had identified 40 percent of HSBOS’s £432 billion loan assets at risk. By the end of the year they wrote off £18 billion in losses.
Instead of saving the UK banking system, Lloyds got swallowed up in its worst moments of crisis and took a massive hit on acquiring a bank Gordon Brown refused to privatise. The subsequent ‘too big to fail’ subsidy put Lloyds in the firing line of public anger even though it did not cause the crisis and continued lending to SME and home-owners during the credit crunch. Politicians and an excitable media are quick to cite the £46 billion of HBOS losses between 2008 and 2011, but are often guilty of confusing write-offs with provisions. It’s clear the author has a lot of sympathies for the Black Horse.
But though Fallon is right to separate Lloyds from the recklessness of RBS and HBOS, one cannot help feeling he is perhaps too sycophantic towards Victor Blank. Lloyd’s unenviable position as the number one mis-seller of PPI in the period 2000-2009 is also glossed over, despite the fact the bank put aside £6.3 billion in 2013 to cover compensation claims (the largest of any UK lender). And for a bank with an aversion to Derivatives, Fallon forgets to mention Lloyds contributed to an FSA fund of £3 billion in 2012 to compensate business customers forced to take out Interest Rate Swaps as a condition for loan approvals. This is not the behaviour of a cautious or boring bank.
Nevertheless, Black Horse Ride is an instant classic and should still be on the book shelves in ten years. Fallon has a wide network of sources and years of experience as a financial journalist and commentator. Readers not steeped in the intricacies of Mergers & Acquisitions, share price fundamentals and impairment provisions should not be daunted by the subject matter and will find this as good as any introduction to the world of Commercial Finance & Banking.
|Posted on March 29, 2016 at 5:10 PM||comments (159)|
My rating: 3 of 5 stars
A Harvard Professor aiming at the hearts and minds of anoraks and airport-dwellers everywhere is a publisher’s dream and will often result in that rarest of phenomenon – a Philosophy text that shifts tens of thousands of units in the English-speaking world. No wonder Atlantic seized the chance to get a High Brow work into the all-important book stands at Hudson and WH Smith on both sides of the pond. Give the book an eye-catching title and a monumental subject and watch the sales roll in. But is commercial success a useful indicator of intellectual success?
Drawing on the latest developments in Social Biology, Moral Psychology and Cultural Anthropology, Moral Tribes is a thoughtful book that is destined to receive wider currency amongst policymakers and large sections of civic society. At the very least it will confirm Joshua Greene as a superstar in academic circles. Yet one cannot help feeling this is a commendable but flabby effort littered with superfluities.
At 353 pages in length, Moral Tribes is a strong defence of Utilitarianism, the nineteenth-century philosophical creed of John Stuart Mill and Jeremy Bentham; but is that enough to justify such a vast undertaking? A constant reminder that humans are tribal creatures that are good at solving the ‘Me versus Us’ problems of cooperation but weak at tackling the ‘Us versus Them’ urgencies of modern life is not exactly new, but Greene is wise to structure his argument around this theme with the aid of the ubiquitous ‘Prisoner’s Dilemma’ scenarios beloved of his profession. So what is he saying beneath the onslaught of empirical science?
In a nutshell, human brains work like dual-process cameras. We have an Automatic mode (the Ventromedial Prefrontal Cortex) that has evolved over millions of years to help us overcome the problem of inter-tribal cooperation, and a Manual mode (the Dorsolateral Prefrontal Cortex) that is used when our gut feelings and emotions fail us. Morality is, in Greene’s words, ‘a series of psychological adaptations that allow otherwise selfish individuals to reap the benefits of cooperation.’ But morality evolved ‘to promote cooperation within groups for the sake of competition between groups.’ In other words, the tension between these two competing forces is the source of our tribalism. Having more faith in our Manual mode is the key to developing larger outer-group cooperation and expanding beyond parochialism. Greene hopes a better understanding of this juxtaposition should allow us to re-appraise the benefits of utilitarian thinking and frame our cooperative decisions and moral choices in pursuit of policies that promote the greatest happiness for the greatest number of people.
Yet devoting two chapters to the dual process brain is a lot of effort for the sake of making a classical Liberal philosophy essential once again. And herein lies the fundamental weakness of the book – despite a succinct title and ambitious topic this really is more of a patchwork concoction of ideas lacking a coherent direction. The intellectual scope is not in doubt, nor is the warm and engaging tone that makes this such an enjoyable read. But at the core of Moral Tribes is a chasm between the reader’s expectation and the author’s delivery.
Nevertheless, you will still get a lot out of this study. Part One of Moral Tribes is a masterful summary of how morality has evolved in human decision-making, including the emotions that dictate our actions and how we’ve developed complex feelings such as empathy and indignation at perceived injustices enacted against people we don’t know. Likewise, Part Five is a skilled attempt to argue the case for John Stuart Mill. For all his greatness, Aristotle gives us parochial morals codes that cannot answer universal truths; Kant’s belief that morality is quantifiable, like mathematics, is still found wanting. We need Utilitarianism just as much as ever.
But in Greene’s view, Utilitarianism is a misleading term that ought to be replaced by ‘Deep Pragmatism.’ And he is right in one observation: the misguided belief that Bentham and Mill’s utility calculus fetishizes rationality above all other considerations to the point of undermining the core of humanity is blinding us to the reality of its benefits. Even more alarming, the few philosophers that still look to Kant for guidance receive more intellectual approbation than the lonely Benthamites of this world. No wonder moral relativism (the idea that no culture or morality is superior to others) reigns supreme in our current politics.
It’s therefore refreshing to hear Greene challenge the status quo by daring to suggest there might be a universal morality that is worth striving for in pursuit of a better future. In his view, hiding behind ‘rights’ in public debate is a cowardly way to close off our Manual brain settings when they are most needed. And his thorough examination of the abortion debate in contemporary America is easily the most sober and iconoclastic examination I’ve read to date. As one experiment shows, people often have a strong opinion on something when they don’t understand the full complexities; ask them to explain their understanding of a topic and they are more likely to moderate their stance and consider alternatives. This being the case, the answer is staring us in the face: our democracy needs more ‘deep pragmatists’ in public office. What a surprise!
Though an underwhelming conclusion, don’t let this discourage you from reading Moral Tribes. Greene’s writing is clear and engaging, considerate yet incisive, and intelligent enough to infuse complex scientific topics with humour. If there’s one thing you’ll get out of this, it’s a desire to enrol on one of his undergraduate courses or download the podcasts.
Perhaps the next book will make him an undisputed star in his field, but for now we have an implicit plea to improve our democratic decision-making with utilitarian reasoning instead of the rationalisations we now use to justify our emotional prejudices.
Unfortunately, with Donald Trump on the verge of winning the Republican Presidential nomination, this looks further away than ever.