City life in 2009: The fallout year

The reaction of UK banks to the global crash has dominated headlines this year. From bailouts to bonuses, rarely have financial institutions caused so much public interest and ire. Simon Evans reviews how they and the rest of the City fared in 2009
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If politeness dictated that it was once rude to ask someone how much they earn, that rule went out of the window with Britain's bankers in 2009. Their pay dominated the headlines and the airwaves like never before.

The year began with an outcry over the pension pot owed to Sir Fred Goodwin, perhaps the most vilified banker in Britain. We learned that Sir Fred, who presided over the collapse of Royal Bank of Scotland, after his empire building went wrong, was still entitled to take home a pension of £693,000 a year.

The Tory Shadow Chancellor described the colossal payout as "utterly grotesque" and, with public anger growing, the Government's City minister, Lord Myners, very publicly stepped in to threaten Sir Fred with court action should he refuse to pay any of the cash back. Of course, it was the unelected Lord Myners who waved through the pension in the first place. Sir Fred eventually agreed to take the altogether more reasonable annual payout of, ahem, £555,000 a year.

While Sir Fred continued in his position as banking anti-hero, Lord Myners spent the year cultivating a role as the Government's City crusader, primed to clean up the Square Mile's excesses. This was the same Mr Myners who, prior to joining the Government, spent time scooping cash working for the likes of Rothschild, Gartmore and NatWest. He would return to bash the bankers and their bonuses later in the year.

After a torrid start to 2009's equity markets, the FTSE 100 sparked into life in March. The index began the month over 3500, but wouldend it at 4125. Apart from a dip in July, the FTSE continued its ascent throughout the rest of the year, galloping to more than 5300 by Christmas.

While the City, at least on the surface, continued to prosper, the rest of the economy continued to suffer. Britain's economy was still mired in recession, despite protestations from the Chancellor at the start of the year that the economy would soon begin to grow again. Britain would remain in recession throughout the rest of 2009, an unenviable feat matched only by Spain among the UK's peers.

Unemployment surged to nearly 2.5 million by October, although the prospect of the three million barrier being breached seemed to recede toward the end of the year, as the number of new people joining the dole queue fell.

According to the Government, some 20,000 companies went bust in the UK during the year – a lower figure than many expected. But with HM Revenue & Customs getting tough on companies failing to pay their tax bills on time, the first quarter of next year is predicted to see a rise in the number of new failures.

While private firms fell, many of Britain's publicly listed businesses were forced to go cap-in-hand to their shareholders and raise billions to plug gaps in their balance sheets.

Banks led the charge to recapitalise, with HSBC tapping its investors for a whopping £12.9bn. Other lenders around the world followed suit, including Bank of America, Morgan Stanley, JP Morgan, Société Générale and ING.

But the UK's biggest and perhaps most controversial banking issue came from Lloyds Bank in the autumn. Its embattled chief executive Eric Daniels managed to raise more than £20bn from the issue, which also saw the inception of the first exotically titled contingent capital or CoCo bond.

In total, more than £50bn of fresh capital was raised by companies during the year, with the likes of Rio Tinto, Xstrata, Wolseley and companies from just about ever sector asking their backers for money in 2009.

Perhaps the biggest winner from the rights issue rush during the year was the blue-blooded investment bank, Cazenove. The group, which goes by the moniker Caz in the Square Mile, got itself involved in pretty much every raising of consequence during the year, swelling its profits to stellar levels. Led by the former Barclays finance director, Naguib Kheraj, Caz's fantastic year would enable the firm's partners to sell their 50 per cent holding in the business to partner JP Morgan for a staggering £1bn.

If the sound of clinking champagne flutes was audible from the Caz offices, not everyone in the City was as cockahoop about all the raising. The City's fund managers vented their collective spleen by condemning the fat fees scooped by the investment banks for underwriting rights issue offerings.

Banks pocket on average more than 2 per cent of any rights issue for arranging such deals; and institutions, led by the FTSE 100's biggest stock owner, the insurer Legal & General, threatened to cut out the banks and help companies raise money on their own. Despite the fuss, the bankers have yet to be frozen out of any deals.

While companies were forced to pump cash into their ailing balance sheets, UK plc had to do the same.

The year 2009 was the year the public learned about "quantitative easing", a lovely euphemism for what was simply known in the past as printing money.

The Bank of England flooded the economy with a staggering £200bn worth of cash throughout the year using the QE programme. Economists are now focusing on the speed at which the printing presses are turned off and the billions of notes awash in the system are sucked back into the Old Lady's Threadneedle Street coffers.

Given the money that has been ploughed into the system to save RBS, Lloyds and the likes of Northern Rock, it will come as little surprise that Britain's indebtedness soared to a record level in 2009.

In September, Britain's total borrowing came in at more than £800bn – which equates to roughly 60 per cent of the country's output. The cost for servicing this giant debt is around £30bn a year or £5,000 for every man, woman and child in the country.

Things got so bad during 2009 that the International Monetary Fund warned that Britain's ability to withstand a further shock in 2010 was about as good as Argentina's.

Britain's coveted AAA credit rating, a key factor in keeping borrowing costs down, was also under threat during the year.

The year also saw Bernie Madoff, the $60bn hedge fund fraudster, finally get his day in court in June. The New York conman received a 150-year jail term, although others mooted to have conspired in the fraud have, so far, retained their freedom.

In October, a second major hedge fund scandal emerged across the Atlantic when Raj Rajaratnam, the founder of Galleon, was arrested. American prosecutors have accused Mr Rajaratnam of an insider trading scam worth more than $30m.

Back in the UK, Britain's financial regulator, the Financial Services Authority (FSA), slapped companies and individuals with fines totalling nearly £35m during the year – with oil giant Shell hit with a £17m market abuse fine in April.

The regulator also made its mark by blocking a number of former banking high flyers from making their return to the Square Mile.

The highest-profile name to be hit by the regulator was Johnny Cameron, the former head of global markets at RBS, who was effectively stopped from joining the investment bank, Greenhill. Later in the year, he joined headhunter Odgers Berndtson, only to be forced out a fortnight later after his new firm was sacked by the Government from a key recruitment contract.

Despite its new stance, it seems that the regulator is now living on borrowed time – at least, in its current guise. In the summer, the Shadow Chancellor George Osborne revealed that the Conservatives plan to scrap the FSA if they win power at next year's general election: "Given everything that has happened, it would be bizarre to stick with a system of regulating the banks that failed so spectacularly."

The year also marked the re-emergence of blockbuster mergers and acquisitions deals in the City of London and New York.

Cadbury, the British chocolate-maker, remains the subject of a £10bn hostile bid from the US foods giant, Kraft. The increasingly bitter bid battle is set to continue into 2010, although a rival US food group, Hershey, might also enter the fray.

In America, pharmaceuticals giants Pfizer and Merck spent more than $100bn buying rivals in two deals, while in Europe, Xstrata tried to buy Anglo American, but failed.

Incredibly, the world's fourth biggest deal was the British Government's £41bn injection into RBS earlier in the year.

British Airways and Iberia finally reached a preliminary agreement on a merger. However, the chief executive, Willie Walsh, remains on the block as the airline struggles with huge losses, a mammoth pension fund deficit and the prospect of staff striking in January.

Float activity was few and far between in 2009, with the recent £676m IPO of the fund manager, Gartmore, the biggest offering of the year.

The traditionally sleepy building societies sector saw a burst of M&A activity in 2009 – unfortunately much of it was forced.

The Dunfermline Building Society was gobbled up by Nationwide in the summer, after its risky investment practices almost saw the Scottish mutual collapse. Chelsea Building Society merged with the Yorkshire, after the former was hit by a £41m fraud scandal earlier in the year.

The insurance sector braced itself for a wave of deals and consolidation in 2009 after Resolution's boss, Clive Cowdery, shrugged off an FSA investigation to buy Friends Provident in a near £2bn deal. It is believed that Mr Cowdery is now preparing for a second deal, with Legal & General and Scottish Widows deemed by analysts to be the most likely targets.

The autumn saw Britain's two largely state-owned banks scramble to extricate themselves from the clutches of the Government's Asset Protection Scheme – an expensive insurance policy underwritten by the Exchequer to help the pair with their more toxic assets.

One would succeed, the other would fail.

As mentioned earlier, Lloyds Banking Group, emboldened by the recently appointed chairman, Sir Win Bischoff, managed to persuade its shareholders – including the Government – to back its giant rights issue. However, the bank still had to pay up £2m for the insurance already received since the crisis began.

Given its rather more parlous state, the RBS chief executive Stephen Hester had little choice but to enter the scheme and submit to its corresponding shackles.

The bank and its board are now in dispute with the Chancellor over No 11's plans radically to curb the size and the nature of bonuses to bankers working for the group. It is believed the board threatened to resign at the time over the matter, something denied by chairman Sir Philip Hampton later. One report has suggested that as many as 1,000 bankers have already quit the bank this year.

Europe, in the form of the formidable Competition Commissioner, Neelie Kroes, added to RBS's woes by telling it to sell off key assets – the price to be paid for the state bailout in the wake of the banking crisis last year. Assets on the block include RBS's insurance business, which could fetch in excess of £6bn, while the bank also has to sell off more than 300 branches.

Lloyds Banking Group agreed to sell off more than 600 of its branches to comply with the EU ruling, although, like RBS, buyers for the assets have been less than forthcoming.

Benny Higgins, chief executive of Tesco Personal Finance, ruled out any purchase of these assets in November: "The thing that we don't have, that we are building, is infrastructure, but the problem is people that are selling things aren't selling infrastructure."

However, there is little doubt that Tesco will be a force to reckon with in the personal banking arena in 2010.

In November, perhaps one of the worst kept secrets in the global financial markets emerged. Dubai World, the giant Emirates-owned investment company that owns the like of P&O, DP World and Nakheel, the giant property company, effectively asked its lenders for a payment holiday or debt-standstill. Global equity markets tumbled after the news, but have since recovered.

Talks between some of Dubai World's biggest creditors, including Britain's HSBC and RBS, began in earnest last week and are set to continue until the new year.

While fears grew for Dubai, an economic tragedy was being played out in Greece.

All three of the world's major credit agencies cut their ratings for the country, amid concerns that it could default on its borrowings in 2010. The Greek Premier, George Papandreou, was forced earlier this month to unveil a stinging package of public spending cuts to rein in the country's deficit – something that Britain's Chancellor, Alastair Darling, managed to avoid in his year-ending pre-Budget report.

Instead, the year ended as it began, with bankers and bonuses topping the agenda.

The Chancellor unveiled a plan to levy a 50 per cent tax on any bonuses over £25,000, a move that would surely score electoral points, but was unlikely to win him any friends – if he had any left anyway – in the Square Mile.

At present, confusion still reigns over who will be hit by the supertax and who will escape. Last week, HMRC seemed to assuage fears that smaller brokers and fund manager will be caught in the net, although contradictions in the small print clearly seem to remain.

So far, only Tullett Prebon, the money broker led by the City corporate bruiser and boxing fan, Terry Smith, has publicly offered his staff the opportunity to avoid the tax and move abroad.

Other foreign banks are hurriedly devising plans to move staff abroad to countries including Spain, Singapore and Switzerland.

In the coming months, we will find out whether the bankers' threats are hollow or real.

who went bust ...

Death on the

high street

Woolworths' collapse was felt well into 2009 as the company's wholesale arm, EUK, was unable to deliver stock to its high street customers. Music chain Zavvi was the highest profile casualty of EUK's demise, and went into administration, closing most of its 100 British stores.

In January Land of Leather soon followed into administration, losing 850 staff as the leather sofa people ran out of cash as the credit crunch bit deep.

Allied Carpets rolled up its operations in July, though nearly a third of employees were saved when some parts of the business were transferred to a subsidiary company.

The demise of First Quench, the company which owned off-licence chains including Threshers, Wine Rack and The Local, has left 6,500 staff unemployed. The company ran into difficulties in October and administrators were called in by the end of the month. Initial attempts to restructure and sell the business were unsuccessful.

More recently, bookseller Borders UK collapsed, like First Quench, under the strain of competition from supermarket rivals and the web. The chain's 1,100 staff lost their jobs last week, two days after the company's 45 stores closed. Outdoor retailer Blacks, camera seller Jessops and JJB Sport were among the other troubled stores groups.