Banking & finance - US banks too big for their boots.

The finance director of a top FTSE-100 company recently had some scathing words for high-flying US bulge bracket investment banks. “They are interested in nothing but the deals,” he said. “We’ve had this experience and it wasn’t to our liking. That’s why we’d rather use a more relationship-orientated investment bank where you can at least count on some follow through.” This company’s European-based banker is not exactly an investment banking pygmy, but in terms of resources and global reach it is light years behind Morgan Stanley Dean Witter and Goldman Sachs.

There is a long running debate on the merits of relationship banks, such as JP Morgan, versus those of deal-orientated banks, such as Goldman Sachs. The assumption is that big companies should give their business to the deal makers. But things don’t always work out that way. For example, last year Vodafone severed its relationship with Goldman Sachs after the bank refused to extend a line of credit.

“When the chips are down some of these Wall Street people won’t even answer the phone,” says the head of a French investment bank. “This is where we have an advantage that cannot be measured by size.” Since these banks aren’t trying to be all things to all people, they can usually provide niche skills in areas that set them apart from the global banks. France’s Societe Generale, for instance, is a world leader in specialist products such as equity derivatives and project finance. It is notable that Barclays and NatWest did not have the resources to take on Wall Street; nor could they claim any geographic or business niche. And so they failed.

From a client’s point of view a lot depends on what services a company is seeking. If you are looking to do a deal in Latin America or Asia you are far more likely to turn to a Goldman Sachs than to a SocGen. But if the scope of your operations is confined to Europe, you will probably achieve a more rewarding long-term relationship using an adviser with a solid pan-European franchise. These banks have experience in servicing UK corporates and, in most cases – Deutsche Bank and SocGen, for instance – they can muster the expertise of the British merchant bank subsidiaries they have acquired over the past decade or so.

Banks with European expertise are enjoying a field day now the euro capital markets have outstripped the US-dollar bond market in size. This last couple of years have been a bonanza for the investment banks in that they are increasing their level of issuance and are raking in significant fee earnings on the back of higher volumes. The creation of the euro has provided a stimulus to an already accelerating trend of takeovers, mergers and other deals as corporates seek economies of scale. Mergers and acquisitions within the eurozone had already been growing by 25% a year in the five years before the launch of the euro, and this M&A activity promises a jamboree for investment bank underwriters.

It makes sense for any corporate planning to access the European capital markets to mandate its business to a European adviser, in the same way that it would not make sense to operate in the US market without the support of a US investment bank.

“The best corporate FDs will have relationships with a number of banks and the tendency today is to reduce that number of advisers,” says Philip Middleton, head of global banking strategy at KMPG. “You’ve got to be aware of each player’s capabilities in the market to mount a credible tender when the time comes.”

One way to play the relationship game is to take a view on the M&A market and talk to the relevant bankers. In good times, the top US houses will only deal with the leading 10 or so corporates in any sector since anything below that doesn’t generate sufficient returns to justify mobilising their resources. But even the bulge bracket banks are likely to be more inclined to talk relationships this year, when their bread-and-butter M&A business is showing signs of a significant slowdown after the 2000 boom.

The Wall Street giants do better in bull markets and take a more humble approach to clients when the deals become scarcer. There are even mutterings these days in Wall Street that perhaps, after all, one should be prepared to offer a minimum of $250m in financing to corporate clients in order to obtain an M&A mandate.

The Financial Services Authority is instructing seven banks to sort out their anti-money laundering controls following an investigation into the 23 banks that had accounts amounting to $1.3bn linked to ex-Nigerian president General Sani Abacha. “The extent of the weaknesses identified is frankly disappointing,” said FSA MD Phillip Thorpe. Potential breaches of regulations are being investigated by law enforcement authorities.

Credit rating agency Moody’s is said to have found a means of drastically reducing the cost of securitisation by eliminating the need for an expensive, ring-fenced “special purpose company” (SPC). Transaction costs could fall from 1-2% to perhaps as little as 0.25% of the value of the deal. Financial News reports Moody’s theory that, under English law, an SPC is not necessary “as long as good title can be established to the assets in a default”.