A diplomatic approach is needed when the integrity of the banking industry is on the line.
When the New York attorney general, Elliot Spitzer charged Marsh & McLennan with corruption and anti-trust violations, he raised legitimate concerns. The custom of accepting higher commissions from favoured insurers in exchange for offering them better insurance contracts has to be scrutinised.
The lawsuit alleges that Marsh, and a number of primary insurance companies, engaged in the bid rigging of insurance policies – clearly, an unacceptable practice.
While the accusations may be valid, the execution of Mr Spitzer’s intervention is questionable. His high-profile approach and vitriolic tone shook the market and Marsh & McLennan stock lost almost 40% of its market value and its bond spreads leaped out by more than 100 basis points. Ratings agencies also swung into action. First Moody’s placed the company’s A2 senior unsecured rating on review for a downgrade, then Standard & Poor’s placed its A+ rating on CreditWatch negative.
It is unclear how such massive volatility in the firm’s share and debt prices can be good for investors or how it contributes to resolving whatever perfectly justifiable aims Mr Spitzer has in mind.
By taking what has become a combative and pugnacious approach, Mr Spitzer’s office could well push investors into taking actions that may have to be reversed later. It is easy to get caught up in the markets’ rush to the exit, but Marsh & McLennan’s fundamentals must not be forgotten amid the current accusations. In 2003 it generated operating cash flow of almost $2bn, and even though the company’s commercial paper programme may stall if it loses its A ratings, US analyst house CreditSights says that the programme is supported by $2.4bn in back-up credit facilities. Additionally, argue analysts, Marsh & McLennan’s earnings stream is well diversified through its Putnam and Mercer units.
Therefore, whatever the outcome of the latest investigations – management changes and maybe swingeing fines – the underlying business is solid. Those institutional investors who felt compelled to exit the stock – or were forced to sell securities because they fell below a certain rating – may well be lining up at a later date to buy them back again. If this scenario plays out, the only winners are the broker-dealers’ trading desks.
Surely a more measured approach could garner the same results with less market impact. Instead of filing a lawsuit why not get the firms concerned and the regulators round a table? The threat of filing may be just as powerful.
The Spitzer process appears highly politicised. It would be easy to accuse him of playing to the gallery to ensure that his mantle as the crusader for the little people is secured. In this case, it is more likely to benefit the Spitzer PR machine than the integrity of the financial services.
