Bankers are showing immense difficulty in living in the present; their heads are in the past imagining all that is troubling the footnotes and bottom lines of their balance sheets and capital reserves is merely temporary before returning ASAP to business as usual? The impossibility and undesirability of that dream they just don't get. Banks failed even before the crisis to understand the implications of the extent that a vast majority of their customers mistrusted and disliked them. That seemed to matter less when share values were riding high and profitability was double that of the rest of their stock markets. This year, all that has changed by a full 180 degrees, and now what customers and clients and shareholders think and feel should matter a whole lot, and not least what Government thinks whose politicians have no choice but to be sensitive to public opinion. Customers and politicians are angry with the banks. Shareholders are apoplectic. Banks have resisted firm guidance from their bail out masters, the Governments, to be supportive of small businesses and households through the recession. They also resist being part-nationalised (witness the extreme embarassment of Barclays Bank, which may yet turn into a resignation matter for the Chairman and CEO) and yet appear to be indifferent to the counterpart of that, private shareholders and shareholder value (the now discredited mantra of private enterprise). HBoS management (like Wachovia and Bear Stearns earlier but before recapitalisation bail-outs) have agreed to sell the bank to Lloyds TSB which is half the size of HBoS for a sum that values the bank at less than a quarter of the minimum it should be. The suspicion in all this is that when push comes to crunch, banks' managements look after no.1 and all the feel-good mission statements about serving shareholders, putting customers first, and the family values of staff loyalty and mutuality were just eyewash rhetoric. When can trust in whatever new mission statements emerge be ever restored?
At the core of much of the anger are bonuses, which seem to be the very last thing managers will forego. Banks, to improve their earnings power and share price could and should cut bonuses at least in half, historically half of net revenues. By reducing compensation from 45 to 35% of investment banking net revenues would alone boost earnings per share by about 40% (equating to a bonus pool of half that for 2007, a record year). The outgoing bosses of RBoS, for example, have apologised to investors for poor performance in shareholder return, but like many other banks, they should be apologising for having said and disclosed far to little when their stocks were falling, for failing to evidence the basic soundness of their balance sheets, and for not reassuring investors with forecasts of recession impacts. There are other serious outstanding matters that banks have yet to apologise for. But, it seems that they will wait until the markets have fully floored themselves on recession fears across the whole of the piste.
Yesterday was a historic day for the market. The Standard & Poor's 500 Index plunged by 6.7% to 752.44. The bear market low of October 2002 was 768.63 — and the index squitted through it like a hot dose of salts. Stated another way, every last £ or $ or € of profit an investor earned — even buying at the absolute low 6 years ago has been wiped like just so much bog-roll. If you bought the S&P just over a year ago, you've lost more than HALF. Furthermore, one third of S&P500 stocks no longer qualify to be in the index! The DOW bounced off my 7500 forecast and the S&P can sink yet lower. Banking shares were among the chief casualties yesterday (November 20th - Wall Street's worst day for over a decade) on the back of rising unemployment figures and a stalled bailout of the US auto industry (where many question why 1% of Government support for Banks cannot go to Automotive?)
Citigroup was hardest hit, its stock falling by 26% in a day and 50% in a couple of weeks). Citi now has a market value of around $25bn or a tenth of two years ago. Relative to book value even if heavily discounted, many banks are obviously over-sold that one can only conclude there is no confidence in bank managements and immense suspicion of the balance sheets. And yet, no-one can point to whatever it is that must be hidden in the balance sheets to justify present share values? What does all this do for the idea of stock markets as information markets? Relatively strong banks saw their shares falling and had little to say; JP Morgan Chase down by 18%, Bank of America down 14%, HSBC only down 1.5% but after hefty loss in the previous session. US unemployment figures are an obvious anxiety factor.
DJIA at 7552.29, S&P 500 at 752.44 - lowest closes for 11 years. Life insurers also fell; Aviva down 16.7%, Prudential -16.3%, Legal & General -13.5% and a bunch of weak U.S. insurers. RBoS jumped 8.8% as investors met to vote on its capital plan of a UK government infusion. Lloyds TSB gained 5.7% and HBOS up 12% on the LTSB vote by 96% of shareholders to support the takeover. Given that the same institutional investors hold shares in both banks, this is however not to taken as a firm belief in the economics of the deal. Barclays fell 1.5% on shareholder discontent over the bank's private Gulf fundraising that continues to hurt the stock.
There will be continuing volatility, short-selling and shareholder gnashing of teeth until other indices rally for some temporary hope and dead cats bouncing to Christmas bonus accounting. Two to three $trillions worth of effective help may yet be needed from Government in various cash and non-cash surety initiatives? President Bush may seek some more last minute interventions given that he must be fearful of his already war-torn legacy being added to by accusation of having destructed the economy and betrayed American Auto, costing millions of Republican votes at next mid-terms, and his being treated as a pariah after he leaves office on 20 January, a self-destructive halo around his ideological brand, now associated with 'Anglo' financial capitalism that the leading officers of banks believed themselves to be the oustanding examplars of. They appeared to believe that the economic system is something to know only from precepts 101, but the global economy does not perform merely according to abstract principles dressed up with the rubric of 'modernisation'. The new generation of banking managements had better decant or recant and embrace an altogether more robust understanding of economics to include social and political responsibilities and go back to rediscover anew the supposed ancient banking traditions of trust, fundamental and ethical values.