Never let it be said that you didn't hear the first whispers in the pages of EuroWeek. Before you could say "who can remember how many hairs you could count on the top of Jon Corzine's head?", Goldman Sachs had loaded its famous president and co-chief operating officer, John Thornton, into an 18 inch naval gun, pointed it towards China, and given the order to fire. Thank heavens Johnny Thornton landed safely and is still looking good, but then this is not a man who ever has a bad hair day. Who loaded Mr Thornton into the barrel? As we have been suggesting in these columns for several months, a turf war has been raging within Goldman Sachs for some time but, true to form, Goldman has been saying nothing and the body bags have been taken out at the dead of night along with the garbage. When snoopy, ill-informed scribblers enquired whether all was well, and were those really body bags, they were met with a wall of silence. However, whenever we passed by Goldman's hallowed door, the whiff of cordite in the air was unmistakable. You didn't need to be Henry Kissinger to know the rival shooting parties. Goldman's traders, led by Lloyd Blankfein, Gary Cohen and Mike Sherwood, were lean (well, leanish), mean and making all the money. Goldie's investment bankers were pudgy, overpaid, under-employed and making the square root of two brass farthings. Something had to give and within Goldman Sachs, money talks and buys more live ammo than the opposition. In our own personal view, the winds of change within Goldman were evident to any well trained eye, thanks mainly to the virtual disappearance of Johnny Thornton. One minute he was there on the centre stage and the next he was playing Banquo's Ghost. Was he ill? Had he done a runner? Had he been following Abby Cohen's stockmarket advice? Instead of seeing Johnny Thornton's well-groomed features, the public voice of Goldman became those steely eyes and the hectare of fine, polished pate of Henry "Hank" Paulson. We have lots of time for Hank Paulson, although perhaps he should hire a new speechwriter with more than a three week vision, but it was clear that the traders had won the day. As the king of investment banking, Thornton was the obvious scapegoat, which is why the traders slapped a first class stamp on his forehead and turned him into a human cannonball. Who might be on their way next? Why did the board of directors at German insurance giant Allianz choose to replace the chairman of Dresdner Bank within hours of the outbreak of war in Iraq? Just when markets were crying out for stability and steady hands on the tiller, why did Allianz elect to ring the changes? It seems very strange to us, but it may illustrate why the market capitalisation of Allianz has crumbled from Eu100bn 14 months ago to just Eu20bn today. What do we know about Herbert Walter, who has arrived from Deutsche Bank to take over from Bernd Fahrholz? Not much, but as he held high office at Deutsche under Josef Ackermann he can't be an intellectual slouch. Our information suggests that he is indeed a dyed-in-the-wool retail banker, whose knowledge of the complex securities business could be written on a Birdseye frozen pea. Please don't think that we have anything against retail banking because, in any country other than Germany, this is the division which usually makes most of the money - look at Bank of America, JP Morgan Chase or even Citigroup and ask yourselves where they might be without their consumer businesses. Was Herbert Walter a rising star at Deutsche Bank, admired and fêted by Josef Ackermann and the key members of the executive committee? Well, yes and no. While Mr Walter is credited with improving the profitability of Deutsche's retail banking business in the competitive German market, there were rumours that levels of customer dissatisfaction with the bank's services were starting to cause concern. Is it possible, therefore, that Herbert Walter's star within Deutsche Bank was no longer shining as brightly as before? A London-based fund manager who recently added to his already substantial holdings in Deutsche Bank told us: "In an organisation where senior managers with an investment banking background call most of the shots, Herbert Walter's career prospects may have peaked, which is perhaps why he decided to move to Dresdner." While we have no truck with idle gossip and inter-office tittle tattle, it does not seem that flags were lowered to half mast and a week of official mourning declared when Mr Walter made his move. Indeed, we have been almost inundated with compliments about Mr Rainer Neske, whom Josef Ackermann has appointed to take over from Herbert. By all accounts Neske is very accomplished, cosmopolitan, speaks excellent English and has the respect of the two main leaders of the investment banking and securities business, Anshu Jain and Michael Cohrs. When we asked about Herbert Walter's relationship with the investment bankers, our Deutsche friend made polite excuses to leave the room. However, we should all rally round and wish Herbert Walter every success in his new role as head of Dresdner Bank because, if we are perfectly honest, there probably weren't too many other volunteers. Outgoing chairman Fahrholz had to be talked into the job but he did significantly reduce costs at both Dresdner Bank and Dresdner Kleinwort Wasserstein. Was it true that Fahrholz was in the final stages of a plan that might have psychologically restored the fortunes of Dresdner and DrKW? Was this grand design nipped in the bud by Allianz's decision to bring in Herbert Walter? We are privy to some information, but have been sworn to secrecy. Most importantly, would it have worked? What a pity that we will never know. While Herbert Walter can apply his skills to Dresdner retail banking business, there are some problems in the loan book, especially in North America, which won't simply go away. And how will he feel about Dresdner Kleinwort Wasserstein? We suspect that Walter has little natural affection for the investment banking business, but he is also clever enough to see what investment banking did for Deutsche Bank's earnings. Will he give DrKW a chance and move swiftly to dispel the negative rumours which have been flying around London and Frankfurt about DrKW's future? Adverse rumours about an investment bank are like a bushfire that can suddenly flare out of control - look at the case of Lehman Brothers, with its back against the wall in the autumn of 1998, and also how quickly the old BZW disintegrated as soon as the first whisper was heard that it might be put up for sale. DrKW has some good people and some good businesses. Let's hope that Mr Walter gives them the chance to prove their worth. We had lunch with Merrill's outgoing chairman and CEO, David Komansky, in Knightsbridge last week. As usual, there were just the two of us because he has never needed to surround himself with chiefs of staff and personal assistants. Because we never drew breath, we ate sparingly, but managed to consume some very serious Italian red wine. We said that Merrill should hold a farewell party for him, but as he has so many friends in the UK alone, it would be necessary to hire the Albert Hall. While our conversation was mainly off the record, he has enjoyed almost every minute of his illustrious career at Merrill - the only sad moments were the aftermath of the fall of Long Term Capital Management and, of course, 9/11. He believes that Merrill is exactly on the right course in these troubled times and was pleased to see that we had been able to open a dialogue with his successor, Stan O'Neal. Would we be giving away any trade secrets if we mentioned that the two competitors he privately admires are Goldman Sachs and Morgan Stanley? Probably not, and as we are having lunch with Goldie and Morgan Stanley on successive days next week, we must remember to tell them. Which investment bank doesn't seem to have noticed that market conditions are at their worst since 1991 and that even some household names within the industry look as if they have been sentenced to death by a thousand cuts? Come in Bear Stearns, a house that we have long admired and seems to be able to chart its own course. OK, the Bear is a slightly quirky organisation, but what is beyond doubt is that its formula works. Even some experienced market practitioners occasionally ask us: "What does Bear Stearns actually do?" In fact, this is not nearly such a silly question as it sounds, because the Bear, since the legendary Alan 'Ace' Greenberg semi-retired, doesn't court publicity. Our usual response is that Bear Stearns is a mortgage-backed structured and prop trading shop with a money-spinning clearing operation bolted on. Add a clutch of seriously clever investment bankers and some of the best cost controls on Wall Street, and that just about sums up the Bear. Sometimes we are asked, "but what about the legacy of Ace Greenberg which was equities trading?". Our response is that mortgage-backeds and the clearing business are, essentially, what has made the senior Bear managers into centi-millionaires. Why can't less fortunate competitors emulate the Bear's extraordinary success, which resulted in a 52% earnings increase in the first quarter? The answer to that is that the Bear blueprint is almost impossible to copy. The clearing business is one of the best franchises on Wall Street and it isn't for sale. Then take mortgage-backeds, which are just too scary for some of the opposition. It is a high risk business which can, as we have seen in the past, lose tens or even hundreds of millions of dollars if things go wrong. The Bear's secret seems to be that it has some of the best mortgage traders on the street who are extremely well paid to remain with the firm, and that demand for mortgage-backeds, because of the higher yields they offer, has been very strong. Despite paying eye-catching bonuses and total compensation of almost $20m to chief executive, Jimmy Cayne, the Bear's key ratio of compensation to gross revenues was firmly held at 50%. Is Bear Stearns an attractive organisation to work for? Yes, because the company is still run like a partnership and the total number of employees is only slightly above 10,000. Yes, because everyone likes to work for a profitable company which is doing far better than most of the opposition. Yes, because the firm is essentially bid-proof as the employees own most of the shares. Surely there must be some drawbacks? Our only reservation is that the Bear is highly competitive and very demanding. Under-achievers need not apply. Do we sense a change of heart at Bank of America in London? Before you could say "who remembers Duncan Goldie-Morrison?", the bank had quietly put most of its European equities operation into the pop-up toaster. Frankly, we never quite understood what BofA was doing in European equities anyway. Had no one told them that equities bite and are heavy maintenance to run? Who was responsible for setting up the European equities business in the first place? Surely it wasn't Dunc Goldie-Morrison, whom we have never associated with equities, and it certainly wouldn't have been our friend of a friend, William Fall, who is far too smart to get himself involved in a lost cause such as European equities. Our only slight concern is that BofA is soon moving out of its dingy premises in London - have they been condemned? - into the badlands of the Dead Canary Wharf. Perhaps there is some financial incentive for decamping to the awful Dead Canary, but the usual reason is to thin out staff by 30% because so many employees will refuse to go there. Also, there is a huge overhang of office space in the Dead Canary and if you are looking for a deal, why not offer CSFB £1 per square foot - they are trying to let half of their cavernous office space. With BofA binning most of its European equities division, each staffer who survives the hazardous journey to the Dead Canary will be given half a floor. Our sensible advice to BofA would be to stick to its knitting and homespun songs around the campfire way of life, which you can still find in Charlotte, SC. Do not try to be flamboyant or exciting - leave that to the traders at Goldman Sachs and Deutsche Bank. Stick to fixed income, which you understand and where any duff position can always be transferred to the treasury book. Roll the dice furiously in foreign exchange, where you should be right up there with the leaders. Flex a little more muscle in commodities. If your commodities traders don't know which way the market is going, simply tell them to try to copycat Goldman's positions - on a reduced scale of course! If anyone asks why you ever ventured into European equities, say that you never knew who those people were anyway and assumed they were tourists who had lost their way. While the share prices of most financial services stocks have been falling faster than polka dot bikini tops on the summer beaches of St Tropez, you have to hand it to Lehman Brothers, whose shares have substantially out-performed some of its swankier, white-shoe competitors. What is Lehman's secret weapon? Has chairman and CEO Richard Fuld come first in a national public-speaking competition after a Fuld look-alike read the wrong script at a black-tie dinner in London? Has Dick Fuld named a successor? Let's hope not, because he is now regarded as one of the best leaders on Wall Street. Who would have forecast that back in 1994, when it might have been difficult to give away Lehman shares as an alternative to free petrol coupons? But look at the situation nine years on. Lehman today may not swagger, but it certainly struts, and who do you know at Lehman who isn't a multi-millionaire, thanks to the stellar performance of the company's stock? Some folk worry about Lehman being awash with call options, which seem to be playing a game of hide and seek, but they are just alarmists and party poopers who have never strutted in their lives. What is the reason for Lehman's success? In fact, it hasn't essentially changed in years. Lehman has always been a very good fixed income house and, with very few exceptions, most of Dick Fuld's inner circle were originally bond or CP traders. With equities in reverse and most of investment banking stuck in neutral, fixed income rode to the rescue once again. Did Lehman's not always fully visible proprietary traders play a blinder? That would seem to be the case, but it would also appear that Lehman performed miracles across the whole debt capital markets board. The top Lehman managers, like their counterparts at other firms, must be praying that the fixed income gravy train doesn't come off the rails - or at least until equities and investment banking have been discharged from the sickbay. Should we be passing the hat around for Matt Barrett, the urbane Irishman and chief executive of Barclays Bank? Probably not, unless you are feeling overwhelmingly philanthropic. The great man continues to look good and how very sensible it was to bury those Canadian Moose roots, which were doing him no favours at all. The Irish are still hugely fashionable, but just to make sure that he is portraying the correct image, Matt O'Barrett should own a horse to run at Cheltenham next year and arrange to be photographed regularly with such Irish luminaries as JP McManus, Molly Malone and John Magnier. Another requisite is to become a firm supporter of and a large shareholder in Manchester United, where influential Irish hands are now pulling some of the strings. The Irish also own the Sandy Lane Hotel in Barbados, but even if you are offered a free suite for a fortnight, Mr O'Barrett could excuse himself on the grounds that visitors to Barbados are mainly lottery winners or the lower social orders on package holidays. When we asked a banker friend - who sensibly cut short a holiday in Barbados after discovering that the next door suite in Sandy Lane was occupied by a bond broker - about Brit tourists in Barbados, he came back with the classic reply, "More tattoos than the Royal Navy." If Matt O'Barrett does buy a horse to enter for Cheltenham next year, what would be a suitable name? We spoke to some of Matt's burgeoning fan club consisting mainly of ladies from the shires of an indeterminate age. One delightful riding instructress purred: "Smiling Shamrock." Yes, that certainly has the right Irish ring about it, but perhaps it is slightly sugary. However, when we asked a stern district nurse from Moreton-in-the-Marsh for her suggestion, she snapped: "How about Fleeced Retail Customer?" No, Madam, that would never do, but we did wonder whether she had her current account with Barclays. Because 2002 wasn't the greatest year for banks or for stockmarkets, the Barclays chief executive will have to learn to live on just £1.7m a year. You may now be thinking of passing round that hat, but remember that Matt O'Barrett receives oodles of perks and very rarely has to put a hand in his own pocket. He need never be short of things to do because when he isn't charming the Harris tweed off his admiring fan-club, Barclays Bank sponsors half of the country's social, cultural and sporting events. There's a good idea. At Cheltenham next year, how about sponsoring a race which could be called the Platinum Barclaycard Irish Hurdle. That would go down a treat with those Dublin race-goers. We were delighted to see Barclays chairman Peter Middleton, the debonair swashbuckler who once danced cheek to cheek with the delicious Belinda Carlyle, receiving an increase of £120,000 a year, but how can he get by on £528,000? We can only assume that Barclays picks up the tab for those immaculate Savile Row suits. While most of the Barclays top brass saw their compensation trimmed back closer than a National Front haircut, Sir Peter's increase was justified by "the value which he brings to the group". Let's take our hats off to the Barclays Bank compensation committee. Our one and only whinge is that they should have upped Sir Peter to a nice round figure such as £1m. He always looks the part, is probably brilliant with big corporate customers and if there is ever a wrinkle which needs to be ironed out with 10, Downing Street or the Treasury, Sir Peter is always on hand to make sure that Barclays lives in a wrinkle-free world. We might also point out to the Barclays compensation committee that they could have given Matt Barrett a bonus on the side for not doing very much at all. By electing to stay on the sidelines, Matt ensured the Barclays shareholders no restless nights and, by keeping his powder dry, he has preserved all the options open to him. Some observers say that Matt Barrett wouldn't pounce on a passing mouse, but we ourselves believe that he is made of sterner stuff. While he has his eye on that wonderfully cushy chairman's role, he should take no chances other than to ensure that the Barclays divi is safer than a first mortgage in Chelsea and that the credit rating agencies are not mixing a poisoned chalice behind his back. Now that Matt Barrett is more Irish than the Blarney Stone, could he be in line for a knighthood? The bookmakers in Dublin are already suggesting that it is a racing certainty.
March 28, 2003
