Month: May 2020

May 23, 2020 Blog Post a Comment

No more birthday cakes with candles

In a Zoom meeting this week, one of the participants noted that her children had referred to the practice of blowing out candles on a birthday cake as being very unhygienic. Indeed this tradition that many of us have had for years is one which should disappear as we think about hygiene in a post-COVID-19 world. For children growing up today it is very unlikely that they will have parties with cakes and candles as in the past. This remark reminded me of a recent feature article in The Economist, “The 90% economy that lockdowns will leave behind.” This article begins to outline the many ways in which our world has permanently changed – much more dramatically than with the financial crisis of 2008.

For bankers the need to focus on a dramatically changing economy is critical and with much more serious consequences than the loss of the tradition of birthday cakes with candles. Many businesses will no longer be viable as the economy adjusts to more social distancing – a practice that will be driven as much by individual decisions as by governmental fiat. Many other businesses can survive but will need to invest in change to do so. And it is not just businesses with direct contact with people but also those with more indirect consequences such as energy firms where there may be a permanent reduction in demand – good for the climate but challenging in its transition.

Banks provide key support to companies in the real economy. Those banks that will be successful should be thinking about the changes that will be coming. These banks should be proactively looking for ways  to support their clients in the transition. The question for all bankers needs to be: What are you doing?

May 20, 2020 Blog Post a Comment

Walk the talk

Today’s Financial Times covered an internal memo from Jamie Dimon to the staff of JP Morgan Chase. Dimon notes the need “for business and government to think, act and invest for the common good and confront the structural obstacles that have inhibited inclusive economic growth for years.” At the same time nearly 50% of his shareholders want JP Morgan to be more transparent in its reporting on environmental issues. Whilst Dimon’s memo noted he would be coming with more specific suggestions in the near future, I think it is fair to ask the question as to why those suggestions are not yet ready? And why are they not yet in implementation? Talk is very good but action makes for change.

At the same time what was JP Morgan’s record in supporting minority owned businesses in the recent crisis programs rolled out by the US government. As noted in the New York Times, there is a noticeable lower level of support for minority enterprises from these programs. One of the best ways to ensure inclusive economic growth is to support minority enterprises that provide jobs and income. Surely as with disclosures on environmental issues, JP Morgan can also provide insight into their efforts in these areas.

Finally although this post focuses on JP Morgan, the issues raised are relevant to all large banks. I applaud the support for inclusive economic growth provided by Dimon’s words, but it is the actions of his bank and other banks that will make the difference.

May 9, 2020 Blog Post a Comment

Don’t mix apples and pears unless you want a fruit salad

Jonathan Ford had an excellent column in the Financial Times this week. He correctly noted that the enormous increase in debt to finance the economy over the last several years makes it much less resilient for survival when times get tough. In particular he notes that this downturn “follows more than three decades of financial triumphalism. ” And indeed bankers are responsible for that “triumphalism” as many of them saw it as a way to increase profits and more importantly their personal bonuses.

However Ford throws in a remark on ESG goals that from my perspective has no relationship with the rest of his premise. He notes that now is the time “for pension funds to spend less time burnishing their ESG criteria and get back to basics.” Whilst I agree with the need for getting back to basics, I would argue that a proper and holistic focus on ESG is precisely the way for investors and bankers to support a healthy real economy that is not over reliant on debt.

Whilst there can be proper reasons to be critical of ESG approaches, they have nothing to do with the overall increase in borrowings. So it is not necessary to mix the apples of ESG with the pears of an over leveraged economy.

May 5, 2020 Blog Post a Comment

Deutsche Bank – lessons for bankers

 

I have just finished reading Dark Towers: Deutsche Bank, Donald Trump and An Epic Trail of Disruption by David Enrich. It is a fascinating book and well worth reading. The book, like the title, does not always hang together as a single story. Rather it is two books for the price of one.

The author spent considerable time and effort to research this book including many interviews with individuals directly involved in the events or with access to documents over the events he covers. His writing style is very engaging giving you the sense of being in the room as the events unfold. Dark Towers often like a thriller but is even more interesting as it is based on true events and real people.

 

The first book is the thriller over the history and misdeeds of Deutsche Bank – going back more than one hundred years. This book is a sad and long story of how Deutsche Bank, similar to other large banks, lost its way with a focus only on short term financial returns. As a story of how bankers can do wrong, it is hard to top. And well worth reading by those concerned about the need for change in banking.

I found the second book even more important. This book provide provides key lessons for how banks need to operate. Throughout there are references to the importance of banks being trustworthy, especially for their clients. Towards the end of the book, Enrich summarises four key lessons for banks:

“(T)he eras of Ackerman and Jain had become parables for the perils of growing too fast, pursuing profits above all else, not caring about clients’ integrity, not taking the time to integrate businesses.”

A better summary of key lessons for banks from the last 20 years is hard to imagine.

He captures well how history and institutional memory within a bank are critical, especially as they relate to risk management and control. He notes the generational shift within banking and how his “hero,” William Broeksmit, was increasingly out of touch with the new generation of traders who were in charge of major portions of the bank. I believe anyone who worked in banking in this era recognizes that shift and its many negative consequences not only for banking but also society that is forced to clean up the financial mess left behind.

Enrich highlights the results of a focus only on high returns on equity for banking – very much the vogue at that time. Joseph Ackermann as CEO sought a return on equity of 25% per year even though the bank had never gone above 3%. Furthermore, Deutsche Bank had a large portion of its activities in Germany, a banking market with historic low returns. An open question is why the supervisory board and investors of Deutsche Bank believed those high returns were even possible.

So I highly recommend reading this book but suggest you do so with two minds. One mind focused on the sad but fascinating story of how bankers can make a mess. The other mind focused on the valuable lessons of how to run a bank sensibly. You will be rewarded on both