All eyes will be on First Republic this weekend.
It’s been a rocky few days for the California-based lender,
who reported on Monday that customers had pulled more than $100bn of deposits from the bank last month. The news sent its share price into a dive on Tuesday.
The slide continued yesterday with the bank’s share price shedding
almost 30 per cent as regulators, banks and potential buyers all held back from helping. The stock has lost 95 per cent of its value this year.
At the moment it looks as though the government, big banks and potential buyers are all waiting to see if anyone moves first.
Tomorrow the Fed will release the findings of its review into its regulation of Silicon Valley Bank, whose collapse heralded the beginning of wider industry turbulence.
Concerns about the bank’s balance sheet had been raised more than a year before it collapsed. But neither ratings agencies, the Fed nor the consultants that SVB hired managed to avert disaster. There’s just one thing observers agree on:
this was a crisis hiding in plain sight.
Meanwhile in Europe, Andrea Enria, chair of the ECB’s supervisory board, has said the central bank will ask
banks about how much of their interest rate risk has been insured by buying hedging products in financial markets, and who their top counterparties are.
Regulators are concerned that the hedges could have moved the risks of rising interest rates beyond banking into areas like hedge funds and insurance companies, where they have less visibility.
The Fed has another problem to contend with:
the mismatch between the resilience of markets and investors, who are feeling bearish.
“Nervous flyers are clearly not running out of new stuff to fret about,” writes markets editor Katie Martin. “... But it feels like pessimists are shouting into a void.”
The green transition and inflation
There’s a factor playing into inflation that has been relatively disregarded until now – climate change.
This week Nicolai Tangen, chief executive of Norway's sovereign wealth fund, pointed to
rising prices for olive oil, potatoes and coffee as signs that food costs could boost inflation for years.
A costly green transition and the reversal of globalisation, which kept manufacturing costs low for years, were also part of the "mosaic", Tangen said.
There have been similar noises in the US where
commenters are concerned that the Biden administration's Inflation Reduction Act and Chips and Science Act could hinder the Fed's efforts to tame inflation.
Part of the problem is that it increases demand for workers. Furthermore, BlackRock chief Larry Fink warned that the push to reshore manufacturing would mean US inflation was unlikely to fall below 4 per cent “anytime soon”.
And markets will struggle. "You’re distorting free markets when you create these incentives and when you create rules that require you to buy from domestic firms,” said Ethan Harris, head of global economics at Bank of America.
“If it was the most cost efficient way to do something, you wouldn’t need a subsidy for it.”
Either you do something, or you lose
There’s
a new guard and a new regime in asset management.
FT journalists identified at least 18 chief executives who have taken the lead at big asset managers since the start of 2022. And they have their work cut out: the “golden era” is over.
“The complexity of the markets right now — not just equities and bonds, but consumer behaviour, economics, geopolitics and regulation — is creating a lot of volatility and uncertainty,” said Andrew Schlossberg, chief executive of Invesco. “That makes creating a long-term business strategy challenging and we think it’s going to be with us for a while.”
There’s been a dramatic shifting of the sands among bourses too. Once upon a time Europe believed it could take on Wall Street, and the LSE enjoyed a “unique global position”. But the US has been outperforming Europe of late, both in terms of number of listings and the valuations companies attract there. Now Europe is playing catch up.
“When you feel the cold wind of being irrelevant it’s a catalyst, a kick in the butt. Either you do something, or you lose,” says Nathalia Barazal, co-head of Lombard Odier Investment Managers.
And the UK government is being urged to do something. Lord Jonathan Hill, who wrote a landmark report on listings reforms, told the Treasury select committee yesterday that
a whole host of changes were needed to halt the decline in London’s IPOs.
“The regulatory side, the corporate governance side, attitudes towards remuneration, cultural issues, attitudes towards risk, all of these are interlinked, and I think we need to think of all of them,” he said.
Taking aim at chief executive pay
As AGM season approaches, chief executive remuneration is firmly in the firing line of proxy advisers and investors.
Glass Lewis and ISS have both
recommended shareholders vote against AIG chief executive Peter Zaffino’s $50mn pay deal.
Glass Lewis says it is above the median of peers “without sufficient rationale”, while ISS has “significant concerns regarding the structure of the award”, particularly the fact it has no performance criteria.
While the AIG pay deal vote is non-binding, that is not the case at Universal Music where chief executive Lucian Grainge is also taking flak
for his $100mn pay deal.
The company faces a binding vote on Grainge’s 2023 pay at the AGM next month. But it will be a battle: two shareholders told the FT that it was too generous, and Glass Lewis and ISS have again warned that investors should reject it.
Eye-popping executive pay packages – as seen in the oil industry – are substantially thanks to luck, not managerial wizardry, argues senior editorial columnist John Plender.
“In a sane world CEO pay would be primarily in cash with equity used only for truly exceptional performance” he writes. “...But this will not happen because CEOs love rewards for luck and have lobbying power. The astonishing failure of corporate governance and investor stewardship over executive pay will not be remedied any time soon.”
Playing the long game
Perhaps boards are digging deep because they are worried about needing succession plans.
Chief executive exits from the world’s top public companies reached a five-year high in 2022, according to research from Russell Reynolds Associates. In 2022, 175 chief executives stepped down from the world’s most prominent companies, up from 133 the previous year.
And London in particular felt the pinch: 38 chief executives in the FTSE 350 hung up their boots in 2022 – more than double the 18 exits seen in 2021.
Finally, any directors looking for
new perspectives on long-term planning and company purpose might be interested to hear from AB InBev’s chief executive Michel Doukeris, and how he has taken inspiration from the Chinese Communist party’s five-year plans.
“In China [there] was this very structured assumption that you want to build things on a more long-term basis,” he says – now he is pushing the company to plan for what suppliers, retailers and consumers may want in a decade.
