THE FLOODWATERS ARE RISING AROUND BANKERS TRUST
Charles S. Sanford Jr. seemed upbeat and jocular as he spoke to the standing-room-only crowd on a sunny September Friday. The chairman of Bankers Trust was addressing a conference on "Women on Wall Street" sponsored by a women's network at Bankers Trust. After he told the members of his audience that he was supportive of their efforts, he warned them that he might "come back for the politics and power section." Amid the laughter, Sanford added: "I need some coaching."
Unfortunately, Sanford and Bankers may need a lot more than that. The bank is still reeling from the aftershocks of the huge derivatives losses suffered by many of its clients, a number of whom have stopped doing business with the bank. One derivative expert says he is aware of half-a-dozen companies that have lost money on Bankers' derivatives but that have not been identified. In a biennial poll of derivatives users by Treasury & Risk Management magazine, which ranked banks on the quality of service they provide in the derivatives market, Bankers dropped from first in 1993 to fifth in 1995.
Bankers' derivatives business, which generated 42% of 1994 earnings, lost $171 million in the first half of the year. Sources close to Bankers say the bank's other businesses, such as private banking and asset management, are also suffering as clients have become increasingly wary of doing business with a bank with Bankers' problems.
PROGRESS? A Bankers spokesman responds that "after our first-quarter losses we feel we've made strong, steady progress toward a return to a competitive financial performance." But most analysts expect overall earnings to be only mediocre for a major bank, 15% return on equity or less. Says Raphael Soifer of Brown Brothers Harriman: "This raises the long-term question about where Bankers Trust goes." That level of performance is below the returns being generated by other money-center banks, even those concentrated in businesses less volatile than Bankers'.
Whether or not Bankers can continue as an independent company remains to be seen. Investment bankers have shopped the bank around, albeit without Bankers' bidding. One source close to the bank says the bank's board had an emergency meeting in mid-September, perhaps to discuss an acquisition bid. Bankers declined comment.
The bank is still under regulatory scrutiny as part of Bankers' settlement of Securities & Exchange Commission and Commodity Futures Trading Commission charges regarding its derivatives sales practices. Derrick Cephas, a former New York State Banking Commissioner and a partner at the law firm of Cadwalader, Wickersham & Taft, and Benjamin R. Civiletti, a former U.S. Attorney General and a partner at Baltimore's Venable, Baetjer, Howard & Civiletti, are auditing the financial institution's operations. Their report will likely be released before the end of the year.
All the turmoil represents a stunning comedown for Sanford, long regarded as one of the brightest and most visionary bankers in the country. Sanford, however, will not be around to see much of the uncertainty resolved, having somewhat abruptly announced plans to retire next summer at the age of 60. Many sources close to the bank felt that President Eugene B. Shanks Jr. would get the top job, despite the fact that he was instrumental in building up the bank's derivatives business.
RUMORS. On Sept. 21, though, the bank hired Frank N. Newman, former Deputy Treasury Secretary, to be a senior vice-chairman and director. That has led many Bankers observers to wager that the succession question has been resolved. One rumor has Newman taking the reins and the bank establishing a co-presidency of the bank shared by Yves de Balmann, co-head of global investment banking, and Kelly Doherty, head of proprietary trading. Bankers Trust says that its board "has stated that it is in the process of identifying a successor to Sanford. That process continues."
Bankers Trust is a long way from the days when it dominated the market for complex derivatives. Sanford might wish that seminars on power and politics would be all that it takes to turn the bank around. What Bankers Trust really needs, though, is to live up to its name.By Kelley Holland, with Phillip L. Zweig, in New York