Banks Too Big to Manage Find Davos Vows Too Hard to WinChristine Harper and Elisa Martinuzzi
Leaders of the world’s biggest banks, from Citigroup Inc.’s Vikram Pandit to Barclays Plc’s Robert Diamond, have failed to honor promises made in Davos to restore trust in their industry after the financial crisis.
UBS AG Chairman Axel Weber, the former Bundesbank president who’s serving as one of six co-chairs of the World Economic Forum’s annual meeting in the Swiss ski resort this week, is taking a different approach. His bank is shrinking.
Weber, whose company is undergoing the most radical surgery of global peers, will be joined in Davos by the chief executive officers of the world’s nine biggest investment banks. All face a skeptical public after their firms were fined record amounts and took charges last year for misdeeds ranging from money laundering and rate-rigging to trading losses.
With each scandal, “the behavior is described as unconscionable and unacceptable, and the following week there’s yet another issue that comes forward,” said Mark Arena, a former head of communications for UBS in the Americas who left in 2010 and now rates public-relations efforts for the website PR Verdict. “There is a growing suspicion among regulators and also among the public that these firms are just simply too big to be managed effectively.”
Since Weber became chairman in May, Zurich-based UBS has been pummeled by past sins. Former trader Kweku Adoboli was sentenced to seven years in prison for unauthorized trades; the bank was found guilty of fraudulently selling interest-rate swaps to Milan; and it agreed to pay $1.5 billion to settle claims that traders manipulated a benchmark interest rate. UBS is now cutting more than 15 percent of its staff and shutting most fixed-income trading to focus on wealth management.
“There is now a debate on whether that’s a unique strategy that UBS is following,” Weber, 55, said in an interview. “Others need to decide what is right for them. But if we read the signs of the times right, then I think we are understanding that the future of investment banking is changing.”
Joining the debate in Davos will be Goldman Sachs Group Inc. CEO Lloyd C. Blankfein, 58, who’s returning for the first time since 2008, and JPMorgan Chase & Co.’s Jamie Dimon, 56, making his third straight appearance. Dimon’s pay for 2012 was cut by 50 percent after his bank suffered a loss of more than $6.2 billion on a trading strategy he called “flawed, complex, poorly reviewed, poorly executed and poorly monitored.”
Diamond and Pandit, both of whom stepped down as CEOs last year, won’t be visiting the Alpine resort this week.
Pandit was co-chairman of the 2012 meeting. “Trust has been broken,” he said at a press conference then. “Banks have to serve clients, not serve themselves.”
Less than three months later, shareholders rejected the bank’s executive-pay plan amid criticism that it allowed Pandit to collect rewards too easily. Pandit, 56, sold his hedge fund to Citigroup for $165 million and received about $15 million in cash over five years at the company. He was replaced in October by Michael Corbat, 52, who will be in Davos this week.
In 2011, Diamond told Bloomberg Television in Davos that the financial industry hadn’t done a good enough job educating the public on “how we add to the quality of their lives” and said “we need to regain the trust of the public.”
Diamond resigned in July after Barclays was fined 290 million pounds ($459 million) for attempting to manipulate the London interbank offered rate, or Libor. His departure came after U.K. regulators said they had lost confidence in Diamond, 61. His successor, Antony Jenkins, 51, will be in Davos.
HSBC Holdings Plc’s then-Chairman Stephen Green, speaking in Davos in January 2009 as banks were still reeling from the global credit crisis, said the business world was suffering from a “lack of trust.”
Last month, the London-based company agreed to pay at least $1.9 billion to settle claims by U.S. regulators that it laundered funds for Mexican drug cartels and sanctioned nations including Iran. The settlement, the largest such accord ever, involved behavior alleged to have taken place from 2006 to 2010. Green, 64, who left the bank at the end of 2010, is now U.K. Minister for Trade & Investment.
Pandit, Diamond and Green declined to comment.
Banks and financial-services companies are the least-trusted industries, according to a survey of more than 31,000 people in 26 countries released this week by public-relations firm Edelman. In developed markets, trust is 10 percentage points lower for those two industries than it was in 2008, according to Edelman’s annual poll of so-called informed publics between ages 25 and 64.
More than half of the people who said they were aware of scandals within the banking and financial industry assigned the blame to issues within the companies’ control such as conflicts of interest, corporate corruption or a culture driven by bonuses and compensation, the Edelman study found. The survey was conducted from mid-October through the end of November.
“We’re going to be in the doghouse for a while,” Morgan Stanley CEO James Gorman, 54, said at an industry conference in November. Gorman will be in Davos for the second time this week.
Financial-market professionals also had doubts about the world’s largest banks, according to a Bloomberg Global Poll. The survey of 921 Bloomberg customers conducted Jan. 17 found 25 percent were “not confident” and 32 percent were “just somewhat confident” that firms could be counted on to take prudent risks and obey the law and regulations. Sixty-one percent said legal woes such as Libor manipulation and money laundering influenced how they viewed banks’ trustworthiness.
Shrinking or breaking up banks was chosen by 29 percent of the people surveyed as the best way to increase their trust in the institutions, while 23 percent said different compensation incentives would be the best fix. That compared with 17 percent who cited different or tougher regulation.
“These things add up to people saying, ‘Why exactly do we think the banks should be this big and this powerful?’” said Simon Johnson, an economics professor at the Massachusetts Institute of Technology’s Sloan School of Management and a Bloomberg View columnist. “People’s patience has worn a little bit thin.”
Under UBS’s reorganization orchestrated by Weber and CEO Sergio Ermotti, 52, the bank is focusing on its core wealth-management unit and shrinking the investment bank. About 10,000 jobs will be cut over three years as the firm exits most capital-intensive fixed-income trading. Investors have rewarded UBS with the highest valuation of global banking peers.
The nine biggest investment banks by reported assets -- Deutsche Bank AG, Barclays, JPMorgan, Bank of America Corp., Citigroup, UBS, Credit Suisse Group AG, Goldman Sachs and Morgan Stanley -- climbed an average 37 percent last year, beating the 13 percent gain in the Standard & Poor’s 500 Index.
Still, of those nine companies, only UBS and Goldman Sachs are trading above book value, which measures how much would be left for shareholders if all of the company’s assets were sold to pay off liabilities.
UBS’s Weber, like bank CEOs in prior years, said in a video posted on the World Economic Forum website that “finance is necessary to assure economic dynamism.”
That message, also behind bank ad campaigns such as Goldman Sachs’s “Progress Is Everyone’s Business,” misses the point because the public already understands that banks have an important role in the economy, PR Verdict’s Arena said.
“The issue of social utility is really now secondary,” Arena said. “It really is a more fundamental issue of, ‘Can you manage these places?’ We don’t really trust what the banks are saying because we just don’t think they even have their finger on the pulse of everything that’s going on.”
Weber will appear with Dimon today at a session titled “The Global Financial Context” to debate how greater capital demands on banks will affect the economy. Deutsche Bank co-CEO Anshu Jain and Bank of America CEO Brian T. Moynihan will join French Finance Minister Pierre Moscovici on a Jan. 25 panel about how to thrive in a world of low growth.
Two days ago, at a panel discussion in Koenigstein, Germany, Jain said that to restore trust banks need to eliminate the issue of too-big-to-fail, overhaul compensation and ensure that scandals like Libor manipulation don’t happen again.
“Eighty percent of the headlines relate to the 2006-2008 period, when the system as a whole went through collective failure,” Jain said. “The process isn’t complete. You can’t change decades of culture over a short period.”
Dimon, who also spoke on the panel, called his bank’s trading loss last year “a terrible mistake.” Still, he said, “lumping all banks together is just unfair.”
As president of Germany’s Bundesbank, Weber warned Davos participants in 2006 against complacency. In 2007, he told banks and investors they shouldn’t expect a bailout from the central bank if they miscalculated their risks.
Such warnings weren’t always welcome. Deutsche Bank’s then-CEO Josef Ackermann said in a Jan. 16, 2007, interview that “we, the eight or nine players in global investment banking, have a very good future.” A year later, he acknowledged that Davos in 2007 had been driven “by an irrational exuberance” and said “I hope that we don’t swing to the opposite this year and give in to an irrational depression.”
Ackermann, a Swiss national, left Deutsche Bank last year and is now chairman of Zurich Insurance Group AG. His successors at Deutsche Bank and other financial companies haven’t indicated whether they’ll follow the example Weber is setting at Switzerland’s largest bank. Ackermann, who will be representing his company at Davos, declined to comment through a spokeswoman.
“The industry should go the way of UBS, reducing risk, complexity and the socially useless activities often associated with financial engineering,” said Daniel Zuberbuehler, former vice chairman of the Swiss Financial Market Supervisory Authority and now a financial-services consultant at accounting firm KPMG LLP in Zurich. “Certain institutions are still too complex to manage and supervise.”