Why high rollers should not believe what is written about them in the newspapers, why pensions funds are determined to lose everything and how investment bankers could soon be dressing up as Mickey Mouse. Brian Caplen explains.
WestLB boxing not so clever
Seventeen days is a long time in investment banking. This, for example, is what the UK’s Independent newspaper said on April 29 in an article called Has Guy Hands Lost the Midas Touch?
“And just as Mr Hands’ star appears to fade [due to the financial crisis at Le Meridien], so that of rival financier Robin Saunders at WestLB continues to rise,” wrote City Editor Nigel Cope. “While Mr Hands has barely struck a deal in the past year, the glamorous Ms Saunders has become the most talked about private equity operator in the City with a high-profile deal on Wembley Stadium and an indicative bid for the utility operator AWG.”
But alas Ms Saunders had not been boxing as clever as The Independent wanted us to believe.
On May 16 WestLB’s CEO Jurgen Sengera had to correct the bank’s losses upwards from E1bn to E1.67bn. The additional losses were believed to relate to the Boxclever TV rental business, one of the deals done by the bank’s principal finance unit led by Robin Saunders.
Ms Saunders and Mr Hands, who used to work for Nomura before setting up his own firm, are without doubt two of the brainiest financiers in London coming up with complex deals that even outwitted the bulge bracket. (Ms Saunders rose to fame by rescuing a bond issue for Bernie Ecclestone’s Formula One in 1999 that Morgan Stanley originally worked on.)
Clever folk indeed but where were the risk managers that should have been monitoring such bold moves?
Were they too frightened to tap the stars on the shoulder and ask searching questions? Or were they just too busy believing what they read in the newspapers?
How to scare an investment banker
Other investment bankers’ risk appetite may soon be tamed by Six Sigma – a 1990s system for improving manufacturing processes and quality – that is now being applied to banks.
JP Morgan Chase and Bank of America (BoA) are its leading adopters and BoA chief risk officer Amy Woods Brinkley explains to me over tea at London’s swanky Lanesborough Hotel how it can be used to manage credit risk.
Next on the agenda could be market risk, an evolution that would bring Six Sigma onto the trading desks. But risk managers of trading floors would have to be green or black belts (as Six Sigma aficionados are known) to apply it.
“This doesn’t have anything to do with martial arts, it’s a management process,” explains Ms Brinkley, whom Fortune magazine rates as the world’s 17th most powerful woman.
“So I don’t have to be scared of you?” I ask. “I didn’t say that,” she replies.
But if Six Sigma doesn’t terrify a hitherto free wheeling investment banker, Bank of America Spirit service training programme – developed with the help of Walt Disney – certainly will. The aim is to raise standards of customer service when the associates (as BoA calls its staff) are “on stage” – ie, facing the customer. Could this be rolled out for investment bankers?
“Wouldn’t that be a wonderful idea,” says Ms Brinkley offering up a vision of a trader dressed in a Mickey Mouse outfit with a cheesy grin and a badge saying “welcome to credit derivatives”.
Relative gains and absolute losses
“Stock markets are not efficient, they are intrinsically dysfunctional.” This is not a member of the radical left talking but Paul Woolley, a former IMF staffer and now chairman of fund manager GMO’s London office.
“The bad news is that this causes bubbles, misallocation of capital, lowering of returns and slower economic growth,” he says. “The good news is that clever fund managers can exploit this disorder to make money for clients.”
Or at least they could do if the pension fund industry wasn’t structured in a way that prevents them. The obsession pension funds have with benchmarks and relative performance means that they are often satisfied with losing money provided they beat the benchmark.
GMO’s chief investment officer Jeremy Grantham believes the situation is getting worse rather than better as the pensions industry becomes more structured and specialised. “Markets are shockingly inefficient and the arbitrage mechanism has largely disappeared,” he says.
Trustees and CFOs that don’t like to hear over-complex investment arguments are part of the problem, as are investment advisers who face “career risk” by suggesting that absolute returns are better than relative returns.
The outcome is bad news for banks with asset management divisions as well as independent fund managers. While the fault is with the pension funds, guess who will be blamed for the bad performance?
