Challenge of controlling the big beasts

Anthony Hilton12 April 2012

LAST week it was an allegation that Salomon Smith Barney in the US had bribed executives with favourable allocations of hot new issues in return for business being directed to the investment bank.

This week it is an allegation in Financial News that a senior official of RAG, the German coal and chemical combine, was offered cash to influence which bank got the mandate for an e8bn (£5.4bn) on merger and acquisition deal. It is hard for any sane observer not to conclude that some investment banking people seem to be running out of control.

We must wait to see what the Financial Services Authority makes of it. At the end of this month it should publish the results of its inquiry into the behaviour of analysts in UK-based investment banks and how they manage their conflicts of interest. Those who have a feel for what is in the paper say it is a disappointing document. It notes, with justification, that things are not quite as blatantly bad here as they are in America but concludes, with a complacency that others certainly do not share, that not a lot needs to be done and the system is working reasonably well.

I beg to differ. People sometimes ask if the City is a more or less honest place than it was 30 years ago. The answer is that it has changed. There used to be bent people and straight institutions. Now there are straight people and bent institutions - in an ethical if not in a strictly legal sense.

It made a fundamental difference when banks moved from relationship banking to transaction-based banking for with that the pursuit of the deal became everything. They now have minimal regard for ethics, routinely put their own interests before those of clients and will use all manner of disreputable tactics to secure a mandate. The real issue for the Financial Services Authority is how it is going to bring the big beasts of the City to heel.

Changing time

TOM Glocer, the head of Reuters, has been in the job one year today and marks it with the worst figures the company has produced in almost two decades as a public company. But it is not his fault.

The information provider sells its services to news organisations which have been hit by the collapse in advertising; to investment banks which are merging and laying off people; and to burnt and bored end investors via Instinet, its stockbroker. It is pretty bad luck to have three legs to a business and find they have all broken at once.

That may not be enough to save Glocer from the flak put up by fund managers anxious to blame him for their own shortcomings. The fact that Reuters shares have fallen further and faster than any other share still in the FTSE 100 requires some explanation, even if it is to say that selling shovels is a great business in a gold rush but does leave one rather exposed when the gold runs out.

This, though, is the big question. Has the gold run out or is there just a temporary lull in production? Have financial services peaked for good after a 20-year bull run or is this just a breather after the excesses of the 1990s?

Glocer seems to think the good times will return. His way of coping with the recession is to cut jobs and costs and to try to get closer to the customer - which may not be made easier if the wrong jobs are cut. He wants a more professional business with less of the journalistic seat-of-the-pants management. Above all he wants to deliver the service customers want.

Mind you, people have been saying that within Reuters for years and it never stopped being the kind of organisation where the right hand had no idea that the left hand existed, let alone what it was up to. That is what Glocer ultimately has to change and it may be that so far he has not been ruthless enough. Give him time though. It is still early days.

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