A banker’s guide to rid­ing the storm

The Jewish Chronicle - - BUSINESS - BY CANDICE KRIEGER

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

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