Tuesday, March 17, 2020

World’s top banks grapple with CEO succession

There is much speculation about who will succeed Aditya Puri as CEO of HDFC Bank. the search for a successor has commenced just about eight months before Puri is due to leave. If it’s any consolation, it’s not the only leading bank that’s trying to ensure a smooth succession. Some of the world’s top banks are grappling with the same problem- and the circumstances at those places are far more challenging.

The CEO of UK’s Barclays Bank, Jes Staley, announced last month that he would step down in about a year’s time. Staley had to quit after financial regulators announced a probe into his links with Jeffrey Epstein, the billionaire who died in jail while facing charges of paedophilia.
Two years, Staley had faced a storm when it was disclosed that he had tried to uncover the identity of a whistle blower who had written to the board of Barclays with complaints about him. The board let Staley keep his job but he had to pay a fine of £640,000 levied by the regulators. 

Staley has been CEO for five years. The board has said it will look outside for a CEO. That says something about succession planning at UK’s second largest bank. If nobody inside measures up, the board should have made the assessment long back. It would then have had time to induct an outsider and groom him or her for the top job.

Things are not much better at HSBC. Its CEO, John Flint, had to step down last August on grounds of under-performance after just 18 months into his job. The board has opted to name an interim CEO which meant that it was keeping its options wide open in respect of the appointment. If that wasn’t bad enough, last month the interim CEO chose to announce a restructuring that would involve shedding 35,000 jobs over the next three years.  What CEO want to own a radical restructuring initiated by somebody else? 

At Swiss giant Credit Suisse, the CEO, Tidjane Thiam, the first black chief of a top European bank, was somewhat abruptly shown the door last month following unsavoury revelations. Last September, a detective from a private agency was caught tailing a former senior executive of Credit Suisse. It turned out that agency had been hired by the Chief Operating Officer of Credit Suisse.

The COO was fired and the board sought to distance Thiam from the affair. However, the plot thickened. Credit Suisse, it was revealed, had also spied on its former head of human resources! To its credit, the board has been quick to name an insider and bank veteran as CEO.   But the perception that the bank’s culture is flawed will not go away quickly

At J P Morgan Chase, Jamie Dimon reigns supreme after more than 14 years as CEO. Last January, Dimon declared blithely that he had not set a retirement date for himself. There is no obvious successor in sight. Naturally. Several potential successors have left to take up CEO positions elsewhere. J P Morgan Chase is a star performer. However, performance does not exempt an organisation from the requirement of succession planning.  

Boards must have a set of two or three potential successors at any given point, with the choice narrowing to one over time. Goldman Sachs is a good example. More than a year before Lloyd Blankfein stepped down as CEO, the bank named two co-chief operating officers. A year later, one of them got the job. At GE under the late Jack Welch, three insiders were marked for succession several years before Welch’s retirement. Jeff Immelt got the job. 

A G Lafley, a former CEO of Proctor & Gamble, has written about how he started work on succession planning virtually from day one.  “Many CEOs,” he wrote in an article in the Harvard Business Review, “don’t push their boards to discuss what might happen when they leave because they don’t want to think about it…”  This was said in 2011. It seems not much has changed since. The upheavals caused by the global financial crisis of 2007 have evidently done little to change governance and culture at private banks. 

Friday, March 13, 2020

Can SBI's rescue attempt save Yes Bank?

Well, it's a long shot. First, the capital infusion may prove inadequate and the non-SBI investors may not have the appetite for investing more. Secondly, a bank cannot be run for too long with deposits from public sector banks (the amount of deposits being talked about is Rs 30,000 crore). A public-private partnership to save a private bank is a first of sorts. The outcome will be awaited with interest.

In 1998, a consortium of banks and brokerages rescued Long Term Capital Management (LTCM) by infusing capital on which they later made a modest profit. But LTCM was a hedge fund,  not  a bank. Here SBI and some private banks will be rescuing a bank that has been a competitor and will remain one if turned around. That's a big difference.

Questions have been raised about regulation and supervision, following the Yes Bank failure. I have not come across any specific lapse that people have ascribed to RBI. They simply presume that if a bank fails, there must be a failure on the part of the regulator. To my mind, the failure happened in September 2018 when IL&FS was allowed to fail. The shocks created then are continuing to take a toll on the financial sector and the economy. In a way, the Yes Bank collapse is the result of the worsening conditions in the economy and in the financial sector consequent to the failure of IL&FS.

More in my article in BS, Question Marks Remain about Yes Bank Rescue.  I also joined the Hindu Parley on the subject with Prof Ananth Narayan of SPJIMR

Wednesday, March 11, 2020

Yes Bank collapse should prompt rethink of bank privatisation

So SBI has been tasked with rescuing Yes Bank. It's a tall order. We don't yet the details of the plan. SBI, it's reported, will submit a plan to RBI, which, in turn, will put it up to the cabinet. That should be a couple of weeks at the least. In the meantime, will the cap on withdrawals of deposits of Rs 50,000 at Yes Bank be lifted? It would be risky, to say the least.

Giving Yes bank to SBI is, I'm afraid, a wrong move. It won't be enough to share up depositor confidence. The government should have nationalised Yes Bank. Then, perhaps, SBI and others to put in some equity and turn it around (although I have reservations even on that count).

Yes Bank was a star performer until 2017 or so. The performance of new private banks has been contrasted with that of public sector banks. There are several issues with some comparisons. They do not cover long enough periods. They ignore rescues of private banks by PSBs. They overlook the larger obligations that PSBs are saddled with and for which they are not compensated (demonetisation, Jan Dhan Yojana, financial inclusion, etc). They do not take into account the fact that PSBs were asked to finance infrastructure projects in the2004-09 boom while private banks focused on retail finance.

Once you make all these adjustments, you will get a different picture. One or two things are fairly certain. All private banks will feel the impact of the Yes Bank collapse. (The Maharashtra government's decision to withdraw funds from all private banks, if imitated by other state governments, is sure to have private banks reeling.). Two, given the shock to the banking system, any privatisation or even a fall in government ownership below 50 per cent is off the table for now.

More in my article for Bloomberg Quin, Yes Bank Revival is a Formidable Challenge.

Tuesday, March 03, 2020

How intelligence agencies use businesses as a cover

America suspects that Huawei, the Chinese telecom firm, could be used for espionage. It has good reason to do so, given that it has a long history of using businesses as a cover for its operations.

Schumpeter has a piece on the links between intelligence agencies and the world of business. The classic example he gives is of a CIA-owned company that produced cipher machines. Governments bought the machines not knowing that their secret communications would be read by America's spying agencies:
By the 1990s it was apparent that the firm (Crypto AG)was in bed with the National Security Agency (NSA), America’s eavesdroppers. The truth, it turns out, was even more remarkable. From 1970 to the 2000s, at least, Crypto AG was wholly owned by the CIA and, until 1993, the BND, Germany’s spy agency, according to the Washington Post. “It was the intelligence coup of the century,” crowed a CIA report. “Foreign governments were paying good money…for the privilege of having their most secret communications read.”
 Schumpeter cites other instances:
In the 1970s, at the height of the Troubles, the British Army established a brothel and launderette in Belfast. Not only could soldiers use laundry vans to move around discreetly, but IRA suspects’ clothes could be tested for explosive residue (both operations were eventually exposed and shot up). MI6 similarly operated a bogus travel agency that would lure republicans to Spain with free holidays, where they could be recruited as double agents. In the 1980s Mossad, Israel’s spy agency, ran a Sudanese beach resort that was used to smuggle out thousands of Jews from neighbouring Ethiopia.
The intelligence agencies also work closely with genuine businesses, often planting their people as employees.  This enables spies to travel freely as corporate executives instead of having to produce fake covers. Schumpeter makes the astonishing disclosure that Soviet double agent Kim Philby worked as a correspondent for the Economist in the Middle East shortly before his defection.

Businesses get paid for cooperating with the intelligence agencies. Schumpeter notes that America's telecom firms have been paid hundreds of millions of dollars for cooperating with the government. Intelligence agencies also provide useful information to companies for their help, information that could given them an edge over competition.

The links between intelligence agencies and the media have been well documented.Government departments are, of course, penetrated. One wonders now about their links with academia.

Tuesday, February 25, 2020

Storm over Trump nominee for Fed Governor, Judy Shelton

Shelton the charlatan, wrote economist Bradford de Long. Shel-no, commented the Economist. This is no way to run a central bank, pontificated the New York Times.

When the establishment gangs up against somebody as solidly as it has done in the case of Judy Shelton, one of two individuals nominated for Fed Governor by President Trump, you begin to suspect there must be something faintly right about her.

Shelton is not an economist. She has a doctorate in business administration. She was appointed Executive Director to the EBRD by President Trump. She was written extensively on economic matters- and quite well, I might add.

What do Shelton's critics have against her? They say she has in the past favoured a return to the gold standard- this makes her seem archaic. They argue that she has changed her views on the Fed's policies several times. She was against monetary loosening a few years ago. Today she favours loosening. She was opposed to the Fed supporting stock prices a few years ago. Now she wants the Fed to do just that.

Well, it's been pointed out that Ben Bernanke himself has spoken favourably about the gold standard at one point. Policy prescriptions can change as economic conditions change. It's not clear that these are sufficiently strong arguments against a nominee for the Fed.

No, the reason that many in the establishment are up in arms against Shelton is that she has challenged a key tenet of the establishment, namely, central bank independence. Shelton has said:
How can a dozen, slightly less than a dozen, people meeting eight times a year, decide what the cost of capital should be versus some kind of organically, market supply determined rate?. We might as well resurrect Gosplan ( the agency of the Soviet government that ran its economy.). 
You can see what gets the goat of the technocratic elite that runs our financial system.

Central bank independence, at the very least, means that monetary policy is set by technocrats insulated from political interference. The idea is that politicians are driven by short-term considerations, such as winning elections, whereas technocrats can afford to take the long view.

Well, maybe, maybe not. Technocrats do have political leanings and loyalties and may want to tailor monetary policy to favour a particular party at election time. Leaving aside voting preferences, central bankers do have views that are politically important. They may favour low interest rates and how stock prices because they have had links with financial firms (or want to hop on to cushy posts in financial firms after they retire). There is nothing apolitical about decisions on money supply.

Money is a public good. And banks, because they enjoy the public safety net, have a public dimension to themselves. The supply of money and the stability of banking are matters that involve the larger public good. Is there any reason why these matters should not be subject to political direction when most other matters in the public realm are? In other words, has the time not come to democratize central banking especially when the track record of central bankers before and after the global financial crisis has not exactly been exemplary?

Many are asking these questions. Shelton's problem is that she asks these questions and wants to get on to the board of Fed.

Wednesday, February 19, 2020

World Bank chief economist departure

I guess I picked this up a little late... the World Bank's chief economist Penny Goldberg, who's from Yale, is quitting.

While the departure was reported to be over the Bank's decision not to publish a paper produced by its research department, the precise details were not know. The FT today  enlightens us on the subject.

The paper, authored by a World Bank staffer and two academics, was about how aid given by the Bank to countries was creamed off by the elite. This is hardly a secret. But for the Bank to substantiate the point with research is clearly to too hot for the Bank's top brass and its principal shareholders.

The link I have provided gives the details of the research paper. The authors looked at aid flows to 22 most aid-dependent countries, flows from those countries to tax havens and also flows from those countries to non-tax havens. They found that periods of large aid flows to a country also saw large flows from the country to a tax haven. At the same time, there was no such surge in flows to non-tax havens.

This is not conclusive proof of the aid being creamed off but it's also not evidence that you can shrug off. The study estimates that 7.5 per cent of the aid leaks out. That may not take away the case for aid to the country- there's still a large portion that could benefit the people there. But it's clearly embarrassing for the Bank to accept that it is abetting corruption in aid-receiving countries. Also, there could be political reasons for the Bank's principal donors to keep the dominant elites in some countries happy.

Goldberg's departure follows the departure in2018 of David Romer following a quarrel over the use of some statistical methods. One should not be surprised if this causes top economists to think twice about spending time at the Bank.

Sunday, February 16, 2020

Goldman Sachs woes

Goldman Sachs, prima donna among investment banks and once the darling of investors, is today a laggard in stock performance, the Economist says.  A dollar invested in Goldman in 2010 would today be worth just $1.60; the same dollar invested in the S& 500 would be worth $3.60.

Investment banks produced higher returns in the past than commercial banks. Today, J P Morgan Chase earns a return on equity of 19 per cent whereas Goldman earns only 11 per cent.

Well, one should not get carried away by the example of J P Morgan; banks in Europe and many in the US produce a return on equity of less than 10 per cent. Goldman's performance is still good but it's not the star it used to be.

One reason, as the Economist points out, is that trading, which typically produced the lion's share of profit for investment banks, today requires far more capital than before, thanks to tighter regulations. It isn't just that. One imagines Goldman would be subject to restrictions on proprietary trading under the Dodd Frank Act. Proprietary trading is where Goldman used to make enormous profit. Moreover, a bank with a strong retail franchise, such as JP Morgan Chase, would have greater access to lower cost funding the form of retail deposits than Goldman.

Goldman is trying to boost returns by trying to expand its consumer finance arm with the help of technology. This is useful but it has its limits: you need a solid branch network to reach out to retail customers, digital alone won't be enough. Another response could be to reduce dependence on trading profit and to try to boost fee income through more debt and equity placements, advisory services, etc.

A fundamental problem for firms such as Goldman is the culture of high pay and bonuses. Despite falling returns, investment banks have been loath to cut back on pay. Until this changes, it may be difficult for them to boost shareholder returns significantly.