With a raft of bankers from Zurich to San Francisco falling on their swords these days, one is tempted to ask why the trend has not caught on in Britain. Taking into account some of the escapades of the past couple of decades, not to mention the ones of more recent days, why are shareholders so soft on bank chairmen and chief executives who get it disastrously wrong? In Japan, senior executives have been elbowing one another for a place on the scaffold. Here in Europe we have had the resignations in swift succession of Mathis Cabiallavetta, chairman of UBS, and Marinus Minderhoud, chairman of ING Barings, over huge losses on their emerging market trading books. Next came BankAmerica’s president David Coulter, who had no qualms about carrying the can for his bank’s exposure to the US hedge fund debacle. “It’s a trend that is totally justifiable but it’s an interesting enigma as nothing has changed in the political or social environment,” says Tim Clarke, banking analyst at Nikko Securities. However, in this cheerful island it’s business as usual. Last year Barclays was forced to sell its investment banking business BZW for £50m less than NAV and only recently it emerged that BZW’s reincarnation, Barclays Capital, had built up £340m in exposure to Russian government bonds. This cost Barclays roughly £200m in trading losses. “The magnitude of Barclays’ Russian provisions (£250m) was a distinct shock,” says analyst John Leonard at Salomon Smith Barney. As indeed was the bank’s £242m loss and first ever dividend cut in 1992, thanks to the proceeds of a £920m rights issue having been frittered away on loans to the property sector as Britain was sliding into recession. The disasters of the past year were in spite of the whizz-bang risk management systems put in place by the bank’s former chief executive officer Martin Taylor. His abrupt departure from the scene in November may appear to signal a reversal in shareholder complacency. However, Taylor’s resignation was the result of a boardroom bust-up between a young, hard-charging intellectual and a roomful of old guard directors who have long been uncomfortable with the appointment of this too-innovative Oxford scholar. That said, while it was not the shareholders who forced Taylor out, few tears were shed at his departure. Taylor had anticipated a 10-year stint to turn the bank around and five years into the job Barclays was lurching from one setback to the next. NatWest startled the market last year with its sudden and complete reversal in investment banking strategy (facilitated by a stunning £79m loss on options contracts) by deciding to sell the equity business of NatWest Markets. “They were firmly committed to building up an investment banking strategy,” says analyst Ian Linnell at the rating agency Fitch-IBCA. “If NatWest was a US bank there would have been pressure on Lord Alexander and Derek Wanless (chairman and CEO, respectively) to go. In this case it was the investment bank’s chief Martin Owen who departed.” But NatWest is a British bank, albeit with a considerable amount of US baggage in tow. Its grand strategy to build a “supra-regional” US bank ended in a shambles two years ago with the sale of NatWest Bancorp at a loss of £690m. Again, as in the case of NatWest Markets, it was the local CEO, not the top echelon, who went with the disposal package. One could even take the saga back a few years and shake the dust off one of the bank’s most shameful episodes, its role in the failed Blue Arrow £800m rights issue, which cost NatWest a severe reprimand from the Department of Trade and Industry, and little more. Then there was Midland Bank’s takeover of Crocker National Bank, a US institution whose potential bad loans exceeded the entire investment that Midland intended to make. This was followed by TSB’s £777m purchase of merchant bank Hill Samuel only weeks after the 1987 Crash, a transaction that was vehemently opposed by small shareholders at an EGM, but which sailed through on proxy votes from institutional shareholders. The deal eventually cost TSB some £2bn in bad debts. Even City favourite Lloyds Bank had to set aside £2.5bn of one-off provisions against bad loans to Latin America, resulting in losses for 1987 and 1989. In some of these cases senior management eventually took their leave with a glass of sherry and a quiet pat on the back, but no one was given the boot for bad judgement. “There has been a tradition in the US of axing someone for serious risk management mistakes,” says Salomon’s Leonard. “As for Britain, there is a sense that bank management has had a degree of insulation from shareholders.” It is tempting to accept the cynical interpretation that with British banks providing returns on equity in excess of 20%, more than double the European average, shareholders are content to put up with a bit of management incompetence from time to time. Undoubtedly there is an element of truth in this argument, and if a bank were to get itself in deep enough to threaten its capital base there is always the alternative of finding a buyer, which provides an added short-term share price boost. This was the case with Midland and to a lesser extent, with TSB. Taking a broader perspective, the softly-softly approach would seem to go hand-in-glove with the long British tradition of tolerance, to put it kindly, towards incompetent management. Take, for instance, one of the most notorious cases of risk mismanagement on record: when the Titanic went down in 1912, the US inquiry into the disaster put forth some uncomfortable questions. However, the investigation in Britain concluded more or less that these things happen from time to time and that to dwell upon issues like affixing blame would be ungentlemanly. The Titanic’s captain EJ Smith even had a statue erected to him, sculpted by the wife of Capt Robert E Scott of Antarctic risk mismanagement fame. Jules Stewart is a freelance journalist.
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