NOMURA is building its Australian investment bank, after poaching Peter Meurer from Citi to head its domestic banking operations.
Recruiting: Nomura has hired Peter Meurer from Citi to be chariman of its Australian investment banking operations. Picture: Bloomberg
MACQUARIE Media Group said today it plans to buy its management rights, effectively removing Macquarie Group as its manager following similar moves from other Macquarie Group-listed satellites.
In a statement, Macquarie Media said it will pay Macquarie Group $40.5 million for the management rights, and plans to simplify its corporate structure by converting to a single holding company.
The group also announced plans to raise $294 million through a deeply discounted underwritten 1-for-1 accelerated renouncable entitlement offer at $1.55 per stapled security, to help pay down debt.
The group’sshares last traded at $2.50 each.
STOCKBROKER and financial advisory firm Bell Financial Group’s profits surged 52 per cent in the nine months to September this year thanks to increased capital raisings, sending the shares to a 15-month high.
Shares in Bell Financial jumped 9c or 8.49 per cent to close at $1.15, the highest since July 2008.
Unaudited profit before tax for the nine months to September 30 was $23.4 million, equivalent to 10 per cent more than the audited result for the whole of calendar 2008, Melbourne-based Bell Financial said yesterday.
More than half of the year-to-date profit came from the third quarter, with pre-tax profit for the three months to September this year coming in at $13.4m.
“We’ve just benefited from a large number of companies going out to raise capital, either for new investments or to repair balance sheets,” Bell Potter Securities product and marketing director Colin Davidson said.
“The value in the market has also risen, so our annuity business has benefited accordingly.”
Mr Davidson said that the pick-up in the business happened from June onwards, as Australian companies took rising share prices as an opportunity to raise funds.
Bell Financial said it also benefited from increases in daily trading activity.
JOHN Kingman, a top civil servant in the Treasury, strode into the meeting room. He sat down, knitted his hands together on the table and started to talk.
As he spoke clearly, and calmly, the five investment bankers sitting across from him could hardly believe what they were hearing.
Royal Bank of Scotland was bust, Kingman said. It was in the grip of the most astonishing bank run Britain had known. Although the public didn’t know, a torrent of money was flooding out, withdrawn by big companies, central banks and wealthy individuals.
Even on the Bank of England’s most optimistic forecasts, RBS would be dead by Tuesday. Unless a government bailout could be agreed that weekend, RBS would be shut down first thing on Monday.
The bankers from Credit Suisse took a deep breath. It was already 3pm on Thursday, October 9. Monday was little more than three days away. Almost four weeks had passed since Lehman Brothers collapsed, spreading chaos throughout the financial world. Banks were dropping like flies. Iceland’s banking system had blown up, while the Irish had been forced to guarantee all deposits. Germany, The Netherlands, Belgium and Italy were beginning to implement emergency safeguards.
AIG, the world’s biggest insurer, had been bailed out by the US government, along with Freddie Mac and Fannie Mae, America’s two biggest mortgage lenders. Everything was in meltdown.
In Britain, HBOS had agreed a rescue by Lloyds TSB, while Bradford & Bingley had been partly nationalised.
RBS wasn’t only the biggest bank in Britain — it had a bigger loan book than any bank in the world, with assets worth more than pound stg. 1trillion. Britain’s financial system was on the brink of disaster, with one weekend to save it.
A day earlier, the government had unveiled a draft plan to recapitalise the banking system, revealing that it would be willing to pump up to pound stg. 50 billion of taxpayers’ money into the banks and building societies over the coming weeks.
The Credit Suisse team had won the brief to implement that plan. Now that they had been brought into the government’s confidence, it became apparent the bailout had to be put into action immediately.
If RBS collapsed, Kingman continued, one-third of payments made every day would stop.
Wages would go missing, bills go unpaid, savings disappear overnight. The bankers knew it would be a disaster that would make the fall of Northern Rock a year earlier seem an irrelevance.
It could even have a more far-reaching impact than Lehman — RBS was about three times the size, with outposts all over the world.
It would be no good just bailing out RBS, argued the Credit Suisse team, led by James Leigh-Pemberton, the son of a former Bank governor. Doing that would simply move the spotlight to other British banks. HBOS could collapse before a Lloyds deal got through the courts. Barclays could also fall into the firing line.
Kingman told them to stick to RBS. For the next three days, a battalion of bankers, lawyers and mandarins crammed into offices and meeting rooms on the second and third floors of the Treasury would have to see off financial armageddon.
Seventy years before, in the basement of the same building, Winston Churchill had plotted Britain’s tactics early in the second world war.
Two days earlier, on Tuesday, Fred Goodwin, the RBS chief executive, stepped through the doors of 1Horse Guards Parade at 5pm, only too aware that his bank was in deep trouble.
Through its American investment bank, RBS was one of the biggest traders of complex credit market securities. Because of its acquisition of much of Dutch bank ABN Amro a year earlier, it was extremely indebted and overly reliant on global money markets.
“The problem was the absolute size of the bank,” said an RBS insider. “We weren’t the most leveraged bank in the world but we were the biggest bank to be that highly leveraged. We had to go to the international casino of the money markets every night and raise a truly staggering amount.”
For several weeks, Goodwin had been appealing for the government to prop up the money markets to help the British banks through the crisis. He’d been backed up by most of Britain’s other big bankers, including John Varley, his counterpart at Barclays.
The debate had played out for days in meetings at the Treasury, involving Alistair Darling, the chancellor, and Mervyn King, the Bank’s governor.
The longer the talks went on, the deeper the crisis became. Rumours of a bailout were gaining momentum.
By Tuesday morning, RBS was struggling with its overnight funding lines, particularly in US dollars. It wasn’t clear that RBS would survive the day.
“In the early hours of Tuesday morning we thought we had time to polish the plan. By 9.30am, we didn’t,” said David Soanes, head of capital markets at UBS, one of seven advisers who had been part of an unofficial team working on a bailout plan for the Treasury. “The drop in confidence in some of the banks accelerated that morning and it was contagious.” Goodwin was ushered into a meeting with Lord Myners, the City minister, in an ante-room next to the office of Nick Macpherson, the permanent secretary to the Treasury.
Myners had only been dragged into government a few days earlier but his new office was full of documents, having become the headquarters of the bailout preparations.
The minister was joined by Tom Scholar, the civil servant leading the Treasury planning for a bailout, and his advisers.
Myners told Goodwin that the government would be willing to give the bank a chunk of cash to boost its capital position and ease market nerves.
Goodwin was quietly furious. “No business ever dies because it’s run out of capital,” he shot back. “Businesses die because they run out of cash.”
He argued that his problems were not more acute than anyone else’s. If the government gave them some short-term cash, it would all blow over.
The two men had never liked each other, having been at odds during RBS’s takeover of NatWest eight years earlier. Myners refused to budge.
RBS needed to be recapitalised — and that was how it was going to be.
After only half an hour, Goodwin was ordered out to make way for Eric Daniels, the chief executive of Lloyds TSB. Myners told him of the capitalisation plans. The American was unfazed, agreeing the system needed capital. Yet he stopped short of saying Lloyds needed help. He could see there might be problems for HBOS, the bank he was acquiring, but the idea Lloyds might need capital did not cross his mind.
By the time Daniels left at 6pm, Treasury officials had started to ring the bosses of other banks and building societies ordering them to a meeting that night with Darling.
At 9pm, Goodwin was back in the Treasury, accompanied by his finance director, Guy Whittaker. Daniels followed soon after, with Tom Tookey, his financial director. After one more private meeting each they were sent off to prepare to see the chancellor.
By 11pm, every bank boss was sitting at a table in Darling’s office, where the chancellor told them what was to be announced, backed up by Myners, business minister Baroness Vadera, Macpherson and Scholar.
The investment bankers helping Scholar, including ex-Citigroup banker Michael Klein, and UBS’s Robin Budenburg, were there to answer technical questions.
None of the banks could fully grasp what was being said. Goodwin was still protesting that he didn’t need capital from the state, just short-term cash.
“I was astonished at how some of the banks could not even see themselves just how bad their position was,” said one of the bankers at the table.
Most of the officials never got home that night, honing the details over a takeaway curry. They thought they had cracked the problem by the time they unveiled the plan the next morning. But on the day, shares in RBS and HBOS dropped 40 per cent, Lloyds fell 15 per cent and Barclays 11 per cent.
Hector Sants, the chief executive of the Financial Services Authority, had spent the past few weeks stress-testing banks, running through doomsday scenarios, such as if house prices fell another 50 per cent.
Once the government had committed to putting in capital, the FSA tried to determine how much each bank might need. HSBC and Abbey were already dealt with as far as Sants was concerned.
Shortly after the government had announced the bailout plan, those two banks were able to reveal that they were transferring a few hundred million from overseas businesses into Britain — and this was enough to keep the FSA happy.
Nationwide, the biggest building society, said it didn’t need the government cash either.
That left the market puzzling over who needed the pound stg. 50bn. Sants was asking the same questions — as was the Bank and the Treasury, backed up by its advisers.
At Barclays, John Varley spoke often to Sants, running through the assets he could sell. He reminded the regulators that the bank had rich friends in the Middle East who had bought shares only a few months earlier at short notice. Sants was not convinced.
At Lloyds, Daniels and his chairman, Victor Blank, were falling over themselves to explain why HBOS needed help — and that they should be allowed to renegotiate their merger. HBOS was starting to crumble under the pressure of it all.
Chief executive Andy Hornby and chairman Lord Stevenson had gone through the wringer already to agree to the deal with Lloyds.
In the markets, RBS was still being torn limb from limb. Although the proposed bailout had helped to shore up confidence, RBS was living on handouts from the Bank of England and the US Federal Reserve.
The bank was preparing for the worst, arguing that the size of the bailout should rise from pound stg. 50bn to more like pound stg. 75bn.
“It was obvious that for both RBS and HBOS we had to fix their problems by the Monday morning,” said Sants. “We made a decision at the tri-partite level, between the FSA, the Bank of England and the Treasury, that it wouldn’t be sufficient simply to recapitalise the two weakened institutions.
“We were worried about the knock-on effect. We knew we had to be able to stand up on the Monday and say that all the banks were properly capitalised.”
By Saturday morning, Goodwin had been ousted by the RBS board but was still negotiating on behalf of the bank. At 9am he was told that the government would plough up to pound stg. 20bn into the bank by a rights issue and some expensive preference shares paying a 12 per cent coupon to the government. It would give the taxpayer a stake in the bank of about 60 per cent.
Tom McKillop, then chairman, was incredulous. Goodwin accepted the news in ashen-faced disbelief. Even the Treasury officials were not sure they could pull it off.
“The basic message was: your bank needs radical action taken, we require a credible solution by Monday, this is our view of your capital position and we are going to force you to take these actions,” Sants said.
At RBS’s offices on Bishopsgate, senior executives were being grilled on their exposures by Credit Suisse. The numbers weren’t pretty but they knew what they were, down to the last penny.
RBS was dead but the funeral arrangements were being conducted with dignity. The only big item to be signed off was Goodwin’s pension.
Sorting out HBOS proved tougher. The risky loans in the corporate lending division run by Peter Cummings were often structured in labyrinthine ways. On the Friday, Hornby had considered pulling out of the Lloyds merger to see if HBOS could go it alone but his advisers told him there was little point. His options were to see the bank nationalised or hope for the best with Lloyds. But Lloyds had yet to realise what was happening.
Eric Daniels exploded with rage. It was Saturday morning and he was in the Treasury once again. When he left his office the night before, he thought he had left behind a conservative, risk-averse institution with no need of state aid. Now he was being told he would have to accept the government as an investor. They had yet to finalise the numbers but the message was clear: Lloyds would need government capital irrespective of what happened to HBOS.
Daniels had thought he was in the government’s good books. He’d offered a solution for one of two problem banks by agreeing to save HBOS. So far as he and his chairman Blank, were concerned, the authorities had changed their tune overnight.
Kingman and Myners explained Lloyds would not be able to pay bonuses to executives or dividends. “There was no swearing,” said one insider. “But it got pretty heated.”
By early afternoon, Treasury officials were inside Lloyds’ Gresham Street headquarters, paving the ground for a taxpayer intervention. They were running two sets of numbers — one for Lloyds as a standalone entity, one for Lloyds and HBOS combined — with teams shuttling back and forth between the Treasury and Lloyds.
Separate teams in the Treasury were working on Lloyds, HBOS and RBS. Myners and Vadera were flitting between all three.
“This whole process was a bit like herding cats,” said one adviser. “Myners, Scholar and Kingman were doing most of the government’s hard negotiating but Shriti Vadera was very good at the cat-herding.”
Although Myners had been trying to persuade Barclays to come to the Treasury, Varley had insisted on staying at Canary Wharf, where he had his executives round him. Myners didn’t have time to argue.
Back at the Treasury, it was the third night with next to no sleep.
Food was hard to come by, with the Treasury kitchen supplying no more than dried-out sandwiches, biscuits and a handful of grapes. “All the Treasury guys had their own mugs hidden under the desk,” said one of the advisers.
The high-rolling bankers began to realise that when the civil servants all scurried off, it meant someone had ordered a takeaway. One banker admitted rescuing pizza from the bin.
Lots of big issues were still to be decided. Stephen Hester had been approached to replace Goodwin but wanted a cast-iron guarantee he could run RBS as a commercial organisation. That prompted the creation of UK Financial Investments to run the Treasury’s investments at arms-length.
Despite Daniels’ protests, the banks also agreed to pay no cash bonuses to their directors that year.
“Is being a minister always this much fun?” Myners was heard to ask Kingman.
By 10am on Sunday, most of the key players had been home for a few hours’ sleep and a change of clothes. Nobody was sure what to wear for a bailout.
The ranks of investment bankers had swelled. Lloyds and HBOS had both pulled in their advisers to lead the renegotiation of their merger deal. Morgan Stanley’s Simon Robey, running the HBOS team, drew tuts from the mandarins for his “tatty” cardigan.
UBS’s Alex Wilmot-Sitwell looked like he’d stepped off the grouse moor in a green tweed jacket.
The arrival of Merrill Lynch’s Matthew Greenburgh raised eyebrows. Although he was there to advise Lloyds, a year earlier he had orchestrated RBS’s disastrous takeover of ABN Amro, one of the reasons they were all there. In Australia, RBS this month completed the rebranding of all ABN affiliates.
Daniels — in jeans, loafers and a crisp white shirt — looked like he had been interrupted on a weekend in The Hamptons. And he was in for another shock.
The tripartite committee had decided how much capital Lloyds would have to raise. At pound stg. 17bn, it was much bigger than Daniels had bargained for. Some pound stg. 11.5bn of the total figure was for HBOS, with pound stg. 5.5bn for Lloyds itself.
Astonishingly, if Daniels decided to break off the merger with HBOS, Lloyds would have to raise pound stg. 7bn, an extra pound stg. 1.5bn. The Treasury bankers said the difference was due to a quirk in accounting rules.
Daniels exploded for a second morning in a row. He felt he was being ambushed, and made no secret of it. “The numbers that the FSA presented were significantly more than the figures the banks expected us to say,” Sants said.
“They didn’t agree with our numbers, with our decisions, but those were the numbers and that was that. All of our forecasts have proven to be remarkably accurate, especially given the circumstances.”
Daniels and Blank remained adamant they wanted HBOS, but they felt their arms had been twisted.
As the debate was raging, Scholar was getting close to agreeing to a deal with Barclays. Varley still refused to budge from Canary Wharf.
By about 8pm, the Barclays team had persuaded the authorities they could raise more than pound stg. 6.5bn from outside investors and had no need of government cash. That was what would be announced the following morning — and they would go on to get an outline deal in place within a few weeks.
That left Lloyds. Day turned to night again. At one point in the early hours, Daniels stormed off for a cigarette. Blank followed to talk tactics. By the time Daniels had lit up on the Treasury steps, his entire advisory team was there.
On the second floor of the Treasury, Kingman was irritated by the delay. A scout was sent down. When he didn’t return, two more went down. Five minutes later, they were all out on the street, conducting the negotiations on the steps in the dead of night.
At the suggestion of a security guard, they filed back inside. There was little time left before the market opened at 7am, when the financial world was expecting to learn what would happen to Britain’s banks. In the end, Lloyds agreed to a deal that valued HBOS at about pound stg. 5bn, a good pound stg. 7bn less than the deal agreed earlier.
At 6.25am, a two-page Treasury statement popped up on traders’ screens, outlining the terms of a pound stg. 37bn bailout for RBS, Lloyds and HBOS — along with details of the bonus restrictions and some token measures to boost the economy. By the end of the day, the FTSE 100 had bounced back more than 8 per cent.
Paul Krugman, the Nobel prize-winning economist, lavished praise on the deal.
“Has the prime minister saved the world financial system?” he wrote in The New York Times. “The British government went to the heart of the problem and moved to address it with stunning speed.”
Three months later, the taxpayer’s RBS stake would climb even higher. For now, however, the banking system had been pulled back from the brink.
The Sunday Times
THE Bank of England has moved to cut interest rates to a record, 315-year low of 0.5 per cent and Bank of Queensland to slash its workforce 10 per cent.
The actions yesterday provide yet more evidence of the hostile environment that faces the global banking industry.
In Australia, though, a timorous, but still contrary, view is starting to take hold — that the Big Four banks are manoeuvring themselves into a position where they can prosper from the fundamental realignment of the global banking industry.
Sure, systemic risks remain, not only in Britain, where the major banks have effectively been nationalised, but also in the US, where lenders continue to fail and threatening clouds hang over the likes of Bank of America and Citigroup.
However, if capital markets start getting less fearful about the domino effect of banks collapsing, and more comfortable about bad debts and capital ratios, then investor sentiment surrounding the Big Four could swiftly change.
This is not just wishful thinking.
Ex-Westpac boss David Morgan said on Friday last week that he saw the majors emerging with huge, enhanced pricing power, following the retreat of foreign banks to their domestic markets and the disappearance of second-tier lenders.
ANZ boss Mike Smith also made his pricing intentions absolutely clear to around 100 big customers gathered for the bank’s board dinner, as The Australian revealed this week.
He said ANZ would be fattening its lending margins, reflecting a repricing for heightened risk in a deteriorating economy, as well as higher funding costs.
For many businesses, the assessment of Morgan and Smith deepened the wounds suffered in recent negotiations with their banks over debt rollovers.
One businessman associated with a food manufacturing company, which actually increased its profit last year, said his bank had jacked up the margin paid over a benchmark borrowing rate threefold to fourfold.
A prominent company chairman put it more bluntly, arguing there was a massive shift in equity under way from the corporate sector to the banking industry.
Stockbroker BBY is sufficiently confident there is a new and powerful trend under way to have upgraded the Big Four, predicting they are well positioned for a 20-30 per cent trading rally.
National Australia Bank, Commonwealth Bank and Westpac were lifted from “hold” to “buy”, while ANZ became a “hold” instead of “underperform”.
“While the short-term pain of the credit crisis — particularly global systemic risks emerging in eastern Europe — remains, we believe major Australian banks will enjoy the long-term gains of diminished competition, increased market share and enhanced pricing power,” analyst George Gabriel said.
There was an obvious caveat, however. Gabriel cautioned that the global outlook was deteriorating and there were systemic risks.
This was highlighted by major bank credit default swaps currently trading at their peak — ahead of levels attained in October and November last year after the collapse of Lehman Brothers.
In terms of the margin grab by the banks, the early warning sign came in NAB’s 2008 annual result, announced last October.
In February, CBA’s December half-year profit, where the net interest margin rose from 1.98 per cent last June to 2.04 per cent, confirmed the trend.
Asset repricing contributed nine basis points, partly offset by two basis points of margin decline arising from the hot competition for deposits.
Chief executive Ralph Norris had this to say about pricing: “The other issue in and around pricing (is that) over the last 10 or 15 years we’ve seen margin for risk effectively competed out of the market, and had such a large amount of liquidity internationally that we saw very, very low interest rates, which led to low margins and significant leveraging.”
Subsequent trading updates from Westpac and ANZ delivered a similar message of widespread asset repricing in an environment of reduced competition.
The big issue for the non-bank business community is whether the majors will — or already have been — over-flexing their new-found pricing muscle.
As one businessman said, if the banks were underpricing for risk in the boom years, it’s not as if their profitability suffered.
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BABCOCK & Brown’s rapid fall from grace has culminated in the former high-flying investment banking and financial services group being removed from the All Ordinaries index.
Babcock’s removal from the All Ords, which is made up of the biggest 500 companies by market value, and from the S&P/ASX 100 at the same time, comes after the company’s shares have fallen from a high of $34.78 in June 2007 to 32.5c when it last traded on January 12.
At its peak, Babcock was valued at more than $9 billion.
Standard & Poor’s index services associate director Simon Karaban said Babcock & Brown stock had been suspended for two months and management had not shown any intention of resuming trading.
“Babcock is an illiquid, non-trading stock,” Mr Karaban said.
“The index committee, which comprises both S&P and ASX members, decided to remove it from the All Ords index.”
Coca-Cola Amatil, IBA Health Group, Sonic Healthcare and JB Hi-Fi have moved into the larger stock indices.
“Industrials, healthcare and consumer staples stocks have moved up in the indices as they are viewed as more defensive and resilient in the current market turmoil,” Mr Karaban said.
Coca-Cola Amatil managing director Terry Davies said the move up to the S&P/ASX top 50 indices followed two years of record profits.
“Since 2001, CCA has delivered 13 out of 16 half-year, double-digit earnings per share growth,” Mr Davies said.
“It is also a recognition of the consistency of our earnings growth and it reflects the defensive nature of our stock.”
IBA Health executive chairman and chief executive Gary Cohen said the company was the biggest software provider to public and private hospitals globally.
“We operate in 36 countries worldwide,” Mr Cohen said.
“In Australia about 60 per cent of public and private hospitals use our software and increasingly more general practitioners are doing so. Most healthcare and IT providers have strong cash flows and are not affected by the global financial crisis.”
Electrical retailer JB Hi-Fi entered the top 100 with ABB Grain, electricity and gas distributor Duet Group, Singapore Telecommunications and Spark Infrastructure.
Six property trusts, most of which have offshore assets, would be dropped from the S&P/ASX A-REITs 200 and 300.
They include Macquarie DDR Trust and Centro Retail Group, both of which own US shopping centres; Tishman Speyer Office Fund, which owns US offices; Galileo Japan Trust, Australia’s first listed trust with Japanese properties; and Mirvac Industrial Trust, which owns industrial properties in the US.
The sixth trust is Melbourne’s Becton Property Group, which operates only in Australia.
Mr Karaban said property trusts performed poorly relative to the entire market.
He said the broad S&P/ASX 200 and 300 indices would be more diversified after the rebalancing.
Fund managers would now have a small number of property trusts to invest in and could face more risk because of the concentration of stocks.
Colonial First State Global Asset Management head of listed property Darren Steinberg said trusts not included in the index would not be attractive to investors. But he said most of these trusts had fallen to such levels they would no longer have institutional support.
All the trusts due for exclusion have been trading at less than 10c a unit.
Patterson Securities equities analyst Jonathan Kriska said fund managers would sell the stocks when they fell off the indices.
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