Chuck Prince has been horribly pilloried for his now infamous “we’re still dancing” comments that came in July, just before the blow up in August. But the fact is that any bank that quit a market ahead of the peak, and any major investment bank that was absent from a key sector at a time of huge build up, would be punished by shareholders for giving up profits.
Chuck Prince’s mistake, if he made one, was in being too honest about the way banks and markets work. But the more interesting issue is the fact that CEOs have to take a view on the medium-term positioning of a bank, whereas some shareholders, many analysts and most journalists are fixated with the next quarter’s earnings.
Arguing the case for a longer term perspective against the clamour for immediate results is one of the most difficult tasks faced by a CEO. Doing it effectively will be essential over the next few weeks as the backlash from poor third-quarter earnings makes itself felt.
Already it is clear that Citigroup, Merrill Lynch and UBS have taken some of the hardest hits among the leading players. What these three banks have in common is that they formerly missed opportunities because they were not in key business areas and that their previous attitude to risk was somewhat more conservative than that of the high-flying pure investment banks such as Goldman Sachs. Maybe in getting more heavily into new business areas, such as leveraged finance, structured finance and commodities, they expanded too fast and their risk management had some catching up to do. But are we really saying that, to use Chuck Prince’s metaphor, they should have sat the dance out?
I met Stan O’Neal, Merrill’s CEO, in his New York offices at the beginning of September, for an interview that became The Banker’s cover story in the October issue. The headline “Unmoved by the Crisis” has provoked some raised eyebrows in light of Merrill’s announcement that it expects to lose money in the third quarter due to write downs of $4.5bn related to CDOs and subprime mortgages and $463m in leveraged lending.
Stan O’Neal is responsible for repositioning Merrill as much more of an all-round investment bank than the equities and retail brokerage business that it was once famous for being. If equities markets were now tumbling he would be regarded as a genius, but with the turmoil in credit he is instead being criticised for driving the bank right into the problem areas.
I doubt whether Stan O’Neal has significantly changed his stance in the intervening six weeks. “The reality is that you cannot be a participant in global financial markets on a major scale without running the risks of a shift in sentiments for certain asset classes. It’s just not possible,” he said then and would certainly endorse now.
He even regretted that the firm’s risk exposure was not higher because some of the businesses were not at the desired level of maturity.
In an interview in The Banker’s March issue, Chuck Prince took a similar line. “Look at us today. In our securities business we are playing catch up because we are not sufficiently strong in commodities but if we had made a commitment to commodities 10 years ago instead of making $100m we would be making $2bn. We didn’t do that. We missed that 10 years ago.”
Whatever turmoil is going on now, when markets recover, firms of the Citi, Merrill and UBS ilk cannot afford to be sitting on the sidelines.
