HILTON TARRANT: Brian Henderson is Managing Partner at Henderson International Advisors. Brian you were a speaker at the inaugural First Avenue Investment Forum on Thursday, and also a member of the international advisory board for First Avenue. A 40 year career in commercial and investment banking, it would be fair I guess to call you a career banker. You’ve been at Meryl Lynch for quite some time and at one time you were on the board of Meryl Lynch South Africa as well as a decent amount of time spent at Chase Manhattan Bank. As a banker, aren’t you one of the bad guys who nearly blew up the world in 2008?
BRIAN HENDERSON: Like in all professions there are good participants and then there are those who haven’t been so good and quite frankly the industry and the profession has been much maligned by the actions or the absence of responsibility of a very few. Unfortunately those few were in substantially large organisations that controlled large if not enormous amounts of both product and money and it just seems at the times and the actions of some individuals unfortunately brought down, not only some great institutions but the consequences are still being seen and will reverberate for some time. It was unfortunate and yet at the same time I believe that the system broadly speaking was able to meet the challenge and turn things back and put it back on a relatively even keel.
HILTON TARRANT: Brian we know a lot of what’s happened since 2007-2008… of course, banks losing large and substantial portions of their market capitalisation, further losses down the line, obviously a loss of liquidity in the system, we’ve had quantitative easing by the US Federal Reserve and a number of other central banks, the great recession on the back of this, and now this lurch towards regulation. Is that going to solve things?
BRIAN HENDERSON: I think it’s going to put it in a better regulatory framework, and what I mean by that is that most of the rules and regulations that are currently being applied to… I don’t want to use the word ‘punished’ but certainly to try and retrieve some of the losses to the system of rules that were written in and laws that were written many years ago. The problem in the past is that they were not properly applied, or at least they were not applied as vigorously as they should have been. So the case primarily in the United States, of which I am more familiar with, a lot of what has come to fore you see in the number of cases that have been filed against institutions that there have been sizeable monetary penalties paid. I believe in the aggregate of the 10 largest global banks including both US and non-US, the number is in excess of $120bn in fines. That is not a small amount of money and those institutions are feeling that pain. So in a sense the long arm of the law and the long arm of the regulator in many ways, is taking its time, but that is a reality and at the end of the day it is proving its mettle, it is having its effect. And in addition to that, you know there’ve been reforms across various regulatory bodies, much more in terms of both resource, human as well as in legal flexibility to apply those rules, but also there is greater harmonisation between national regulators and the case in point being obviously the US regulators enforcing more of an extra-territorial view, cooperating and indeed in some cases, initiating cooperative arrangements with Bank of England, the European Central Bank now, as you know they’re going to have more of an oversight responsibility for the entire union starting in September of this year. So in many respects I think the broader principles and the broader applications of the rules of the game are being better implemented and it will indeed be that much more onerous on the participants in the system. But I believe that the cases that have been tried so far and part of my talk yesterday was that on aggregate, there were 22,000 law suits filed against both US and the non-US global banks since 2008. That’s not an insignificant number and the costs thereof including not only the fines, but also compliance… the need to reinforce the oversight within each institution, I believe, is going higher. I believe you saw the announcement made by JP Morgan that they had hired 8,000 additional people to assist in just money laundering surveillance and compliance worldwide. So the value proposition for the financial services industry, generally speaking, is under a substantial amount of cost and burden due to a reinvigorated regulatory system.
HILTON TARRANT: You raised an interesting question at the talk, how will the investor community rate and value financial institutions in the future, obviously against this backdrop. Have you got thoughts on that?
BRIAN HENDERSON: I think that they need to be made aware… quite frankly most analysts do not really understand the regulatory environment and they should. It’s in the interests of the market that they need to get better acquainted with those regulatory improvements, and indeed have a sense of how management within each of the different institutions, are able to not only be proactive, but actually begin to start establishing a track record of how they are going to protect the shareholder in future, with regard to compliance within the organisation overall. And it isn’t just simply on ensuring that there isn’t excessive risks taken in the trading accounts and/or the underwriting activities especially in the investment banks, but across other areas involving money laundering side of things, there’s a greater burden on reporting of financial transactions taking place cross-border, tax issues which are going to be implemented clearly more on a global scale. Some of the things that you’ve heard and seen both of UBS and Credit Suisse are a case in point, the arrangements made with the Swiss banks with the US regulators… that is not an insignificant cost. So the broader strategic definition of how not only global service industry is going to be evolving in the future, but even national and regional banks are going to be held more and more to the fire as far as their compliance in these areas. So analysts and the market observers and those who are responsible in looking forward in terms of the value proposition to the market, are going to take this particular part of cost and of management experience into the future. It is really something that they should avoid at all costs and just kind of dismiss it as a one-time event… it is going to be ongoing. And by the way, a lot of the settlements, especially the larger banks that have come to the fore, are actually multi-year and if they don’t reach certain hurdles in terms of their internal compliance, then there’ll be additional costs and additional penalties, including in some cases, specially for foreign banks in the United States, that they may actually lose their banking licences. So you have an entirely different regime today in terms of regulatory oversight and that has direct and obvious implications in terms of valuation in future, and future analysis.