Summit Notebook

Bank regulator Walsh has pragmatic philosophy on financial crisis repeat

John Walsh has spent many years in Washington — having worked at the Senate Banking Committee, the Treasury Department, and now as  acting Comptroller of the Currency — and has a bit of perspective on government reaction to crises over the years.

So he has a fairly pragmatic philosophical approach on whether U.S. efforts will succeed in making sure the financial crisis does not recur.

“It is hubris to imagine that we can anticipate all the things that can go wrong and prevent them. That has never happened in human history, I don’t know why it would happen here,” Walsh said at the Reuters Future Face of Finance summit.

The Dodd-Frank set of Wall Street reforms includes components that are “on point to try to avoid such a thing happening again,” he said.

The Federal Reserve and other bank regulators are “absolutely right” to add liquidity during a crisis, but that is different from having an expectation that large financial institutions must be saved from failing, Walsh said.

“It’s that challenge of trying to figure out who’s the dead guy in the crowd as the whole boat seems to be headed for the bottom — how do you keep the boat afloat but still weed out the bad actors on the boat that have gotten themselves into insolvency?” he said.

And with a bit of a twist on philosopher George Santayana’s famous saying, Walsh adds: “Those that have studied financial history know we’re doomed to repeat it.”

High level tourism wins some wealthy fans

While wealthy clients remain ultra-cautious about real estate, some are being tempted to snap up trophy properties that promise to throw off a healthy amount of cash.

On the fringes of the Reuters Global Private Banking Summit, Banco Santander executives said they had been involved in six to eight large real estate transactions including the sale of a Miami marina in this year.

In another deal, a Mexican client snapped up a chunk of distressed commercial real estate in Spain from a seller seeking to cut leverage. The properties were returning more than 6 percent in cash flows, a healthy spread over the buyer’s 4 percent borrowing costs.

More recently Santander private banking unit Banif assisted a client in the sale of the Valderrama golf course in Spain to Australian golfing legend Greg Norman.

Valderrama was the site of the first ever Ryder Cup to be held outside the United States or the UK in 1997, when Europe’s top golfers defeated their U.S archrivals.

Diversified cash flows were the major attraction of this type of property, said a Banif executive, citing membership fees to the golf club and rentals of the club’s real estate and subscriptions to related services.

 “There is still demand for high level tourism,” he said.

Fear factor driving gold higher

“Gold is not an investment. It doesn’t pay you interest and it doesn’t increase wealth,” complained one investment advisor recently as he perused exploding client demand for the yellow metal.

“It’s just a cautious asset for scared investors,” he grumbled as he waved a chart showing prices had once again hit an all-time high.

Some anecdotal evidence suggests he may have a point.

Bankers at this week’s Reuters Private Banking Summit said investors were loading up on gold to the tune of some 7 to 10 percent of their portfolios.

The traditional motive of hedging against inflation was conspicuous by its absence.

The wealthy were buying gold because they were worried by the possibility of deflation, by a collapsing dollar or by the threat of prolonged financial turmoil.

Many were getting exposure through gold-backed exchange traded funds or gold stocks related stocks.

You can’t avoid the taxman, but there may find a friendlier one in the Alps

With the German government hot on the heels of untaxed wealth stashed in Swiss bank accounts, and the U.K. government taking a tougher stance on clawing back bonuses, rich folks will likely head for the hills – or the Alps to be more precise – senior private banking executives said in Geneva. 

“People are going to arbitrage different tax jurisdictions. We are going to see European clients moving to Switzerland, very large families,” said Alberto Valenzuela, deputy chief executive of Societe Generale Private Banking (Suisse) SA.

JP Morgan, which specialises on clients with $20 million to invest, is hoping to tap into the pool of wealthy exiles.

“We are seeing an affluence of international people moving to Switzerland and we want to develop a practise that can serve families,” said Pablo Garnica, head of private banking for Europe, Middle East and Africa at JP Morgan.

How rich is rich?

How rich is rich? For most people, the answer is simple: ”not me.” But for private bankers keen to handle the assets of the well-heeled from Moscow to Malibu, that question is a slippery one. Sometimes a simple number won’t do, either.

Just about every executive at Reuters Global Private Banking summit in Geneva has a different standard for what those in the business call “ultra high net worth individuals”, the really rich that are the industry’s prime catch.

For example, Britain’s Coutts & Co, which counts Queen Elisabeth II among its clients, likes at least 30 million pounds in total net worth and 10 million pounds in liquid assets.

At UBS, it’s $50 million in investable assets. JP Morgan’s private bank sets the bar at $20 million. UniCredit demands 30 million euros. Citibank wants $25 million. 

Afraid your bank account doesn’t make the grade? Don’t despair. Sometimes potential is enough to go “ultra”

Alberto Valenzuela, deputy CEO of Societe Generale private banking in Switzerland, says the sophistication that a client shows could put him or her among the ultra-wealthy years before a defining ”cash event”. Getting 100 million euros in a will, he says, can make you a wealthy client, but not necessarily a sophisticated one.

Below the “ultras” — way below — banks stake out an area for ”high net worth individuals”. At Coutts, that’s 5 million pounds in total net worth, for Societe Generale 5 million euros. Rock-bottom entry to private banks is for the “affluent” — 500,000 euros at UniCredit. At Spain’s BBVA, it’s 300,000 euros, sliding to $100,000 or clients in China.

ABA’s Yingling sees danger in rhetoric: it’s Wall Street, not banks

Ed Yingling, president and CEO of the American Bankers Association, is a little worried about the rhetoric that’s been flying around as Congress tries to produce financial reform legislation.

And he wants people to be clear that the problems are with Wall Street, not banks.

Though, the differentiation gets a little tricky here because some of the largest banks in the country and biggest players on Wall Street are members of his organization and received taxpayer bailouts. The thousands of other banks that his trade association represents did not.

“The general tone has I think been harmful, particularly to the banks we represent,” Yingling said at the Reuters Global Financial Regulation Summit 2010.

But at least one key person got it right — President Barack Obama in his speech on “Wall Street Reform” last week, Yingling said.

“He never used the term bank in any pejorative sense,” he said. “He used it in a factual sense.”

“It was clear that they realized that they need to differentiate between banks and Wall Street activities,” he said.

Thain says put shareholders first

John Thain says he put shareholders first and his interests second in deciding to sell Merrill Lynch to Bank of America.

Thain, speaking at the Reuters Global Finance Summit in New York, said a deal to sell a partial stake in Merrill Lynch to Goldman Sachs would have been better for him, but the sale of the entire Wall Street firm to Bank of America was the best outcome for shareholders.

Over a fateful weekend in September 2008, as Lehman hurtled toward bankruptcy, AIG floundered and the financial system looked into the abyss, Merrill held discussions with Bank of America, Goldman Sachs and Morgan Stanley for various transactions, Thain said.

Initial discussions with Bank of America involved either the sale of the entire company or a 9.9 percent stake and a multibillion credit line, the former Merrill CEO said.

With Goldman, discussions only involved the stake sale and the credit line. Discussions with Morgan Stanley about a strategic transaction were brief, he said.

“When Bank of America offered $29 a share on Sunday afternoon, it was clear to me that was the best thing for our shareholders,” Thain said. 

Thain was fired by Bank of America soon after the deal closed, and is now considering a career in private equity and other jobs. 

Private banking: you may be worth it

Those who tend to avoid posh restaurants in Geneva’s expensive Rue du Rhone district and famed private banks because they believe they are not rich enough may be given a second chance at century-old wealth manager Julius Baer.

The Swiss private bank, which has made its name thanks to the services it offers to the ultra-rich, believe its powerful high-end brand may be keeping potential clients away.

“It’s a bit like the nice chic restaurant on Rue du Rhone you walk by 10 times and think: “I am not so sure I can go in there, it might be a bit sophisticated,” Boris Collardi, Chief Executive of Bank Julius Baer, told the Reuters Wealth Management Summit in Geneva.

“And then you end up going in there and you have a wonderful meal.”

Private banking services at Julius Baer start at around 1 million Swiss francs.

Worth trying?

Tinkering whilst debt burns

What have Liverpool Football Club, French building materials firm Materis and German forklift truck maker Kion got in common?

They have all been beneficiaries of European banks’ preference to tinker with company balance sheets rather than fundamentally restructure indebted businesses, one speaker said at this week’s restructuring summit.

However, such easy conditions — primarily because banks are reluctant to take big hits on their balance sheets — will not last long if banks’ balance sheets continue to strengthen, speakers said.

“Come the new year there will be a new spate of companies being allowed to go to the wall,” Blackstone’s Simon Davies said.

Tony Lomas, who heads the business recovery services group at PricewaterhouseCoopers, said many companies would need to go back to their banks for restructuring.

“I cannot see an upturn in the UK, Europe or the world that will be quick enough or healthy enough to sort these problems out,” he said.

“Rich, retired and gone”

Veteran insolvency expert Nick Hood gave the restructuring summit a sobering reminder of the shortcomings of corporate finance.

“Every time we have a recession I sit down with the head of workout for bank clients and ask what banks are going to learn,” said Hood, who first qualified as an accountant in 1970.

“Absolutely nothing” was their response when asked during the last recession in the early 1990s, Hood said.

“Within three years, they said, there will be high loan to value (ratios) on commercial property, covenants will be loosened and lo and behold it happened … the odds are against any learning,” he said.

He explained: “What happens is when the cycle turns, everybody’s gone — they are rich, retired and gone.”

To make things worse, Hood told the summit, there is a global shortage of turnaround specialists.