Tough Times for British Banks

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Rough day for Royal Bank of Scotland.

"RBS last posted net income in 2007," back when just about anyone could post net income; since then, counting today's 3.5 billion pound ($5.4 billion) net loss for 2014, the total losses come to just under 50 billion pounds. That's more than 9,000 pounds for every man, woman and child in Scotland. It's more than Bank of America has paid in mortgage settlements. At some point, if you were RBS's managers or its owners (mostly the U.K. government), wouldn't you start thinking it might not be worth it to keep going?

That is not that far from chief executive officer Ross McEwan's conclusion:

McEwan, 57, announced “significant” job cuts at the investment bank as part of his efforts to reduce the number of countries in which it operates by two-thirds, while seeking to complete a rundown of the unit housing toxic assets by the end of the year, 12 months ahead of schedule.

A very bank-y thing about RBS is that, after seven years of multi-billion-pound losses, management's focus is on share repurchases: "By the time we get to 2016, we hope to have satisfied the preconditions we think are needed in order to start a discussion" with regulators about dividends or share repurchases, says the chief financial officer. I feel like the regular-company model is, if you make a lot of money, you give it back to shareholders; if not, not so much. The RBS model is more like: We are losing so much of your money, you shouldn't trust us with it, here, you take it back. Capital requirements make this difficult, but if RBS can shrink its assets faster than it loses money, it stands a chance.

And for Standard Chartered.

"As part of an orderly succession plan balancing stability with fresh perspective," StanChart's board rather surprisingly parted ways with its chief executive officer, Peter Sands, and replaced him with former JPMorgan banker Bill Winters. The stock is up, and shareholders seem happy, or whatever this emotion is:

“Sands was an absolute disaster and the chairman was asleep when it was his job to replace the CEO,” said David Fergusson, chief investment officer of Singapore-based Woodside Holdings Investment Management Pte., who owns the bank’s shares. “Bill Winters is a good choice, a proper banker. It’s extremely good they didn’t pick someone internal.”

The chairman is also leaving. "With the share price having about halved since its March 2013 peak, the stock market was looking for a fresh start," said one analyst, which seems fair. Here is more on Bill Winters from the Financial Times.

And for HSBC.

The hits keep coming. I enjoyed the New York Times headline "HSBC Executives, With a Lot to Explain, Give It a Shot," but I gather that those executives did not enjoy testifying before Parliament about all the tax-dodging that HSBC facilitated, to be fair, several years ago. ("As recently as 2007," but 2007 is a long time ago. In 2007, RBS was profitable!) Also about CEO Stuart Gulliver's use of a Swiss bank account held by Panamanian shell company to receive his bonuses, which Gulliver has patiently and repeatedly explained was just to keep his co-workers from seeing how much he made, and not to dodge taxes. As explanations go, that is not one that I'd want to give repeatedly to Parliament. Here's a live blog. It's all so bad that it's driven Emma Thompson's husband, a "profound" socialist, to stop paying taxes

And for Morgan Stanley.

Morgan Stanley agreed to pay $2.6 billion to settle Justice Department mortgage-fraud claims, as it announced in an 8-K yesterday that also "increased legal reserves for this settlement and other legacy residential mortgage-backed securities matters by approximately $2.8 billion" for 2014. For 2014:

The firm’s executives had faced increasing pressure to strike a deal. In doing so, Morgan Stanley still can account for the additional legal costs in its 2014 results without restating its annual report.

Yep, that's the math: Morgan Stanley announced 2014 earnings last month, with $6.2 billion of income from continuing operations. That number will be decreased by $2.7 billion, because mortgage settlements can travel back in time to previous quarters, though they can only go so far. For instance, it's hard for them to travel past official financial statements on 10-Q and 10-K quarterly and annual reports, so it was important for Morgan Stanley to get this done before its 10-K. Why does this keep happening? One possibility is that it's a story about how work expands to fit the available time, and how the notions of "available time" are elastic: "We need to get this done before we announce earnings" becomes "Well okay we definitely need to get it done before the 10-K." But another possibility is that it's a small form of psychological earnings management: You announce earnings without the unpleasant charges, so investors focus on the actual business, and then you announce the charges separately, but before the filing so you don't have to restate.

Lazard is great though.

Here's a story about a Lazard banker in Europe named Vincent Le Stradic who clearly loves his job, and his life:

In 2012, Le Stradic interrupted a sailing trip in Sicily on his Scottish Bermudan cutter to help Sawiris on a deal, showing up at a meeting with an Italian CEO in tight trousers and flashy sneakers because they were the only clothes he could buy at the airport.

Oh sure, that's why. There are other war stories here, including the time that he represented two clients on opposite sides of a deal ("I was literally emailing myself a term sheet I had done with one party in the morning and responding to it with the other party later on in the afternoon!"). Le Stradic is described by a client as "someone with a strong ethical sense so people trust him," and by himself as "the master of obfuscation," which is how you know he's a good banker. If those descriptions were reversed it would be a problem.

Happy Buffett season.

There's a saccharine hint of Cherry Coke in the air as Berkshire Hathaway gears up for its annual meeting, the 50th under the folksy regime of one Warren Buffett. Here's a story about how Berkshire is inviting shareholders to come a day earlier than usual "and enjoy discounted shopping at our exhibits." Here's a story, with the astounding dateline February 25, 2015, about how Buffett drinks a lot of Coke. Here's a story about how Blackstone Group wants to be more like Berkshire Hathaway. Here's Stephen Foley reading Buffett's 1965 letter to investors, which begins like so:

Our War on Poverty was successful in 1965.

Specifically, we were $12,304,060 less poor at the end of the year.

Ha, I love tone-deaf Randian 34-year-old Buffett. Not a cheeseburger or Cherry Coke in sight.

The revolving door.

I'm a bit late to this story about how academics found that ratings-agency employees who leave for investment banks tend to increase their ratings before leaving, but it's a good data point in choosing a theory of the revolving door. One of the academics is quoted in the story saying: "Even if there is no quid-pro-quo dynamic, if I have the ability to affect the performance of my future employer, it’s in my own interest to think positively about it," but why? One generically plausible revolving-door theory is that banks should hire the toughest credit raters, because (1) those raters know all the tricks and (2) then those raters won't be rating the bank's securities any more. But that is refuted by the empirical evidence here: "If an analyst is hired by one of the top 20 banks, rankings rise by 0.35 level on average compared with an average 0.18 grade increase for all analysts switching positions." The simple model might be that everyone in a ratings agency wants to leave after a few years to go into banking, so this is a repeat game, and if the banks hire the toughest raters that will encourage their replacements to be even tougher. Meanwhile, RBS's new chairman is a former Bank of England deputy governor "synonymous with the 'light-touch' regulation which allowed Royal Bank of Scotland to spiral out of control."

Disgorge the cash.

J.W. Mason has a new version of his "Disgorge the Cash" paper, which argues that the provision of credit to businesses is not as important as it once was, because of what businesses do with that credit:

As we will see, it turns out that the businesses that have been borrowing the most since the end of the recession have not been those with the highest levels of investment, but rather those with the highest dividend payments and share repurchases. In other words, the health of the financial system might matter less for the real economy than it once did, because finance is no longer an instrument for getting money into productive businesses, but instead for getting money out of them.

The Washington Post discusses his paper here; obviously I am sympathetic to the view that public capital markets might be more about rewarding shareholders than funding businesses. But here is Felix Salmon on "Why staying private sucks, if you're a tech company."

Things happen.

MetLife's investors are considerably less optimistic about its "systemic importance" lawsuit than its management is. Insider trading in Putin's Russia. "Jewish persecution and distrust in finance." Orphan oil wells. Does your nondisclosure agreement restrict you from whistleblowing? Did United Put a Whole Route in the Sky for One Very Important Passenger? The only way to make e-mail tolerable is to write your own e-mail client. Brigitte Bardot Pays For Russian 'Alcoholic Bears' Romanian Rehab. You can actually eat KFC's new coffee cups. "Like a bespoke TGI Fridays located on the grounds of Le Petit Trianon."

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This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net