James Moore: In this case it's not the bankers that the OFT should have in its sights
Friday 11 June 2010
Outlook A pologies for indulging in a football related metaphor (it's not as if we'll be starved of them over the next month) but it appears that the Office of Fair Trading is shooting at an open goal with its launch of an investigation into the way investment banks underwrite share issues (in other words, the fees they charge).
After all, what better way of currying favour with just about everyone (with the exception of the City, boo) by lining up the institutions that have led us helter-skelter down the road to ruin for a thorough and well-deserved kicking. Who won't be cheering from the sidelines as the boys and girls from the OFT go to work?
Just look at what those dastardly investment banks are charging, after all. They split a record £2bn in 2009 (the OFT says), during a year when rights issue offerings by UK plcs hit a record £70bn on the London Stock Exchange. The average fee approached three per cent of what was raised. And we all know how the investment banking tail has been wagging the dog in any number of financial markets over the last few years – to our cost.
Trouble is, the open goal that the OFT is shooting at might just be (in this case) at the other end of the pitch. The consumers of underwriting services are hardly wide-eyed innocents. They are chief executives and finance directors who are paid vast salaries and even bigger bonuses for (supposedly) being good at running businesses. Now you might have thought that would involve possessing a certain amount of skill in handling negotiations.
While three institutions – Goldman Sachs (them again), JP Morgan and Bank of America Merrill Lynch – have been at the top of the rankings for the last 10 years, it's not as if they are the only games in town. Competitors do exist, who would be only too happy to take on the work if a canny company boss were to feel the big three were playing fast and loose with the fees.
In fact, there is usually an almighty scramble for that work whenever a cash call is afoot. Investment banks hate missing out when there are fees to be had. They like to claim, sniffily, that quarterly league tables "don't matter". But they do. They really do.
Given this situation, is it really too much to expect a savvy chief executive to be able to barter down the fees? We all know that investment banking is a relationship business (although given some of the people that work in it, you do sometimes wonder). And to maintain relationships with key clients, they spend a lot of time and money buttering up the company bosses who pay their fees. That's why the corporate seats at Wimbledon and Lords Tests are always packed to the rafters.
But surely a chief executive who is sufficiently ruthless to cast thousands of people out of work at the stroke of a pen, should be able to resist such blandishments when it comes to agreeing fees for rights issues (you can hardly blame the banks for charging as much as they think they can get away with, that's just business).
And if not, shouldn't the fund managers who are their shareholders (on our behalf) raise questions – even if they do get a chunk of the money back through such wheezes as sub underwriting. After all its the shareholders who are called on to put up the cash raised through rights issues. Did anyone mention "absentee landlords".
The OFT has characterised its work as "a study" although its been looking at the issue for some time now. It is to be hoped that it resists the temptation to use the current climate as an excuse to secure an easy win by indulging in a bit of banker bashing. Banks might have committed a multitude of misdeeds but, in this case, if there is a problem it lies firmly in Britain's boardrooms.
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