A banker’s guide to riding the storm
THE US sub-prime crisis continued to hit home in the UK this week, with bank shares falling sharply in response to concerns over their exposure to vast potential losses.
Already, HSBC and Barclays have announced write-downs totalling £3bn. The markets are also pricing in heavy losses among other big banks, and commentators are warning that the wider consumer economy and the housing market could be hit hard.
But not everybody at the sharp end is panicking about the current crisis.
Credit Suisse’s Ian Marcus, for one, is still optimistic. “I don’t think we are heading for a recession,” the 48year-old managing director of Credit Suisse’s investment-banking division tells JC Business. “We are probably heading for a slowdown in the economy, but we shouldn’t technically go into a recession.”
Mr Marcus, who has been in the baking industry for 28 years, does acknowledge that things are difficult. “It is a slightly unhealthy scenario at the moment and the mood is quite sombre,” he says. “This time of year is always difficult as people are positioning themselves to make sure they are remunerated and make sure the business is in good order and set up to deliver in 2008.”
His own bank has come under pressure to declare its exposure to the US sub-prime market. It has written down almost £1bn in a move that flattened its investment-banking profits for the third quarter.
Mr Marcus, also president of the British Property Federation, can see where the wider risks lie. Today’s markets are precarious, he believes.
“All it needs is for another bank to produce very bad results, or not recognise the issues it had to deal with, and we’ll see the collapse of some particular business or venture.”
He tells JC Business: “There are two scenarios you can look at. There is a bull-market scenario that says this is just a kink in the road, there will be a market correction and we will bring liquidity back into the market, once the inventory has been sold by the banks and then off we go. In this projection, the US economy stabilises and we keep moving forward. That could take three, six, or 12 months.
“Then there is a much more bearish scenario that says what we are seeing in the financial and property markets could extend into the broader economy. We will see inflation coming back into the UK because of rampant oil prices, and we could see a major financial institution have some problems, which leads to a crisis of confidence.
“And then you have a scenario where banks will feel obliged to increase interest rates to avoid inflation coming back, we have a period of zero growth and then we are in a very difficult scenario for five to seven years.
“The truth probably lies somewhere in the middle, and any particular event could tip the market one way or another.” He adds: “But we all have jobs to do and that’s what we should be focusing on, and looking after our clients.”
For Mr Marcus, who rode out the downturn of the early 1990s, this is familiar territory. “I am not saying that there aren’t some difficulties, but this is not the worst I have seen it. This is very different from the consequences of the early ’90s when I was putting companies into receivership and holding crisis meetings on a regular basis.”
The investment banks have, over the past ten years, invented increasingly complicated and intricate ways of structuring financial instruments out of bundles of debt-generated mortgages provided by the lending institutions. So, have banks been playing too risky a game?
“Yes, I think the financial markets have become hostage to what they have created,” he says. “There is no doubt about that. What the banks have tried to do is take what are heterogeneous products, which can be real estate, and turn them into a homogenous product: a bond, an equity, a derivative that people rank accordingly and then acquire, without too much underwriting.”
But he insists: “I am not worried. These are thought-provoking and challenging times — more disconcerting for some than others.
“We have to get back to fundamentals, particularly in real estate,” he adds. “You can’t just buy a piece of real estate and expect it to go up. You have to roll up your sleeves, manage it and work it.”
He anticipates that the credit squeeze could be compounded by other problems — notably oil prices and inflation — and could feed through to slower growth in real estate. “The last couple of years, real estate has generated returns of 18 or ten per cent in the UK. Now it may be minus. The return on property in the next year will not be very exciting, but property is a longterm investment.”
What does this mean for City bonuses? “All the banks have hired quite aggressively this year and are now be- ginning to rethink that. So, what you are finding in some places is cuts at the edges — banks using it as a tidy-up to move on people they don’t think will make it to the next level, and bonuses will not be as effervescent as they have been in the last couple of years.”
Commenting on the future, he notes: “There will be some fundamental changes over the next couple of years. Firstly, the big operators, investors and companies will get bigger, and then there will be the niche players. You do not want to get caught in the middle ground.
“The other all-embracing change that will affect the real-estate industry is the green agenda. You will find lots of regulations which will require you to do certain things with your real estate, residential or commercial.”
A Cambridge University graduate, Mr Marcus joined Credit Suisse First Boston in 1999, having previously worked for Bank of America, UBS, NatWest and Bankers Trust/Deutsche Bank.
Today, he is chairman of Credit Suisse’s European Real Estate Investment Banking Group and of the Bank of England Property Forum. Home is in Stanmore, Middlesex, where he attends Stanmore United Synagogue.
Credit Suisse’s Ian Marcus sees the City in sombre mood, but is upbeat