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Thursday 4 December 2008

Time to start putting clients first again

Simon Nixon says trust in the City is at rock-bottom but he sees a glimmer of hope in the rise of boutique banks

So why do I still stick by my view that we could be on the threshold of a new model of investment banking, in which relationships once again come first? Partly because the process is already underway. Even at the height of the boom, there was a steady exodus of top bankers away from the big banks into smaller specialist boutiques. Hedge funds and private equity were one manifestation of this desire to escape the ferocious politics of the big banks. Meanwhile, independent advisory firms such as Lazard, Greenhill, Evercore and Perella Weinberg have prospered, winning lucrative mandates on major deals by stressing their independence and client focus.

But it is not just employees voting with their feet that will bring about change. Regulators and shareholders will also play their part. The credit crunch exposed huge flaws in the current model of investment banking. Just look at the number of bosses who have lost their jobs during the crisis — Chuck Prince of Citigroup, Stan O’Neal of Merrill Lynch, Marcel Ospel of UBS, et cetera. That’s a sure sign these institutions had become unmanageable: too big, too complex and the risks impossible to control. Shares in many of the leading Western banks are down more than 50 per cent from their peak, to levels not seen for almost a decade. That is bound to lead to pressure from shareholders to rethink the strategy. It is notable that even the architects of some of the banking giants, such as Sandy Weill of Citigroup, have acknowledged these institutions are too big.

Indeed, the process of dismantling some of them is already underway. Citigroup, until recently the world’s biggest bank, is shedding some of its consumer businesses. UBS, the biggest European casualty of the crisis, is undertaking a strategic review of its investment bank that will see the Swiss giant exit businesses that don’t add value to clients. That is likely to spell the end of UBS’s disastrous foray into proprietary trading. Meanwhile, banks that do not adapt voluntarily may find change forced upon them by regulators. Central banks are looking to extract a price for the extravagant support provided during the financial crisis in the form of new restrictions on their capital. That will force banks to be more judicious in the way they use their balance-sheets.

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