Swords poised, but no one is falling

How long can UK bank chiefs escape the fate that has befallen their counterparts in other countries, asks Bill Jamieson

Only one UK director has had to leave a UK bank and that was because he had angina. You have to say that is curious

ACROSS America and Europe, the credit crisis and its deepening aftermath has traumatised the banking industry and triggered an unprecedented spate of firings and departures. From Citigroup to UBS, Lehman Brothers to Belgian bank giant Fortis, the axe has swung without mercy across a generation of bank bosses and senior executives.

Only one country seems to be immune from this bankers' bloodbath: Britain. The chairmen and chief executives of Royal Bank of Scotland, HBOS and Barclays remain at their posts despite share price collapses considered unthinkable barely a year ago.

Here are just some of the casualties elsewhere: Stan O'Neill, ousted as chairman and chief executive of Merrill Lynch last October, was one of the first to go after writedowns of $8.4bn – since sharply increased. Charles 'Chuck' Prince, chief executive officer of Citigroup, America's biggest bank, resigned in November. James Cayne, CEO of Bear Stearns, left in January. Joseph Gregory, CEO of Lehman Brothers and Erin Callan, chief financial officer, have gone. Peter Wuffli, UBS chief executive, and Marc Ospel, the chairman, were ousted in April after massive write-downs of $37bn (£18bn). Ken Thompson, CEO of Wachovia Corp, America's fourth-largest bank, was ousted in June. And Jean-Paul Votron, head of Fortis, was ousted earlier this month after losses and a cancelled dividend.

So how long can Royal Bank chief executive Sir Fred Goodwin and Andy Hornby, his counterpart at HBOS, continue in their posts? And why are their respective chairmen Sir Tom McKillop and Lord Dennis Stevenson still in situ? What is the case for them to be spared the cull that has befallen their counterparts in other countries?

Last week Legal & General, the UK's biggest institutional investor, broke ranks to publicly question why more bank chief executives have not fallen on their swords following huge losses suffered by their shareholders.

Mark Burgess, head of equities at Legal & General Investment Management, suggested that bank directors needed to be more accountable for the sector's spate of writedowns and question-begging rights issues, some of which have spectacularly backfired.

"We have seen the top 11 executives leave UBS, the heads of Citigroup and Wachovia step down and the chief executive of Merrill Lynch go," he said. "But only one UK director has had to leave a UK bank and that was because he had angina. You have to say that is curious." (Steven Crawshaw, chief executive of Bradford & Bingley, which needed three attempts to raise money through a rights issue, resigned due to ill health).

The disgust also appeared to extend to the news last week that Gary Hoffman, the new chief executive of the nationalised Northern Rock, is to receive a £700,000 salary and £1.2m in compensation for leaving Barclays. So it is not just that UK bankers have so far survived in their posts, but that the sky-high remuneration culture continues to prevail – even for a bank where the Government underpins the balance sheet and taxpayers bear the risk of failure.

Bank management and leadership are issues that extend beyond earnings and dividends for shareholders. Banks are critical to the successful operation of a modern, sophisticated economy. Without strong banks we are not going to recover from the deep recession ahead. So what is the case for changing the executives at the top? And what is the case for the defence?

The central charge against Sir Fred Goodwin is that he led RBS into what is widely acknowledged to have been a grossly mis-timed acquisition of Dutch banking giant ABN AMRO last year. The result was a colossal over-payment for the business and huge strains on the RBS group balance sheet. This acquisition followed a long trail of purchases over the past six years, with assurances given by Goodwin that he was seeking no more purchases. But in size and in ambition, the bid for ABN rode a coach and horses through those assurances.

The subsequent credit crunch and write-downs of assets required the bank to launch the biggest ever rights issue cash call on shareholders just as the credit crisis was deepening in intensity. Even at the offer price of just £2 a share, more than 70% below the pre-crunch peak last year, the offer was touch and go. And since the issue, shares in RBS have continued to struggle. Attempts by RBS to sell the Direct Line insurance operations have foundered, as have attempts to offload the ABN operations in Australia.

Over at HBOS, a deeply discounted £4bn rights issue turned into a flop which has severely damaged the credibility of the executive board. The combination of Hornby and Stevenson, which worked well when times were good, does not look nearly so convincing in the straitened times we are now in – and it will be years before the housing market recovers.

Both banks need a change in leadership to mark a break with the past and to manage the radically different terrain of the post-credit crunch world.

What of the defence? Neither RBS nor HBOS plunged into the US sub prime market in anything like the scale of their US counterparts, and have not suffered comparable losses. So why hang the executives for crimes not committed?

To the extent responsibility attaches for the write-offs suffered, there is an evident reluctance to change captains in the middle of the storm. Moreover, Goodwin has acknowledged skills in cost savings and the integration of acquisitions. Why throw out the very qualities you now most need? Chairman Sir Tom McKillop acquitted himself well at the RBS EGM and holds the support of those who have seen him in action. In any event, where are the obvious replacements?

At HBOS there is no doubt that a prolonged rights issue timetable combined with opportunistic hedge fund short selling have gravely exacerbated the share price fall. The group has little exposure to the US sub prime mortgage market and its mortgage lending has been largely free of the excesses that have brought down US banking institutions. HBOS is also the UK's biggest mortgage lender and, here again, a leadership change may worsen rather than improve confidence.

Ironically, if the miserable share ratings of these banks continues or worsens, institutions may be reluctant to move against senior executives for fear of increasing the uncertainty and making matters worse. Conversely, should there be a share price recovery, critics are likely to become more emboldened in their demands for changes at the top.

But as the institutions become more emboldened, so, too, would opportunistic predators. Shares in HBOS were swept up almost 18% on Wednesday on rumours of a possible bid from Spanish bank BBVA (capitalised at £36bn). Others are talking of a possible break-up bid. Could Hornby mount a credible bid defence? And would shareholders, shocked by the share price plunge in recent months, be in any mood to listen? The ominous prospect is of investors eager to grasp at any bid if it allows them to get out at something other than a knockdown price.

The same logic applies to RBS. The bigger it has grown, the stronger the argument would grow for break-up to realise some value for the shareholders. Indeed, there are already concerns that banks such as RBS have grown to be financial conglomerates – too big for one board to manage, and with their subsidiaries likely to do better under separate and more focused management.

For the moment, the immediate focus is on weathering the storm, cutting costs and securing asset sales where possible. That is what both banks are now doing. Institutions, for their part, prefer the more discreet exercise of influence behind the scenes to ensure effective management actions are being undertaken. Who is doing them matters less than that they are being undertaken. But as the slowdown deepens, pointing to a prolonged period of contraction through 2009 and into 2010, the feeling will grow that a new era will need new management at the helm.