Outlook: Sengera ejected as Saunders fails to save German banking

Unilever warning; George/Howard
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"German country bumpkins fall victim to American femme fatale." That at least is one way of summarising the extraordinary saga of Robin Saunders and her teutonic masters, the smallish German regional bank WestLB. The affair has already generated acres of column inches, if for no better reason than that Ms Saunders is so pleasing on the eye, but very little in the way of illumination. So how to explain this dramatic clash of cultures, which yesterday claimed its first scalp, Jürgen Sengera, WestLB's chairman?

From the moment Ms Saunders first started appearing as the public face of WestLB in the City, it all seemed very odd. What was a German Landesbank doing dabbling in British private equity, and why with such a high-profile operator, whose fingers seemed to be in virtually every deal that was going? In truth, it was always more noise that substance, yet the Saunders profile and bandwagon kept building until eventually and inevitably one of her deals fell flat on its face, resulting in a €430m write-off.

That in turn has given Mr Sengera's political opponents back home in Germany - for German Landesbanks are still more political than commercial organisations - all the rope they needed to hang him with. At root, the whole affair says more about the parlous state of German banking than any failings either on the part of Mr Sengera or Ms Saunders.

Mr Sengera wanted to break loose from the shackles of low margin German banking market; Ms Saunders saw the opportunity of a big balance sheet and plentiful quantities of cheap, essentially government subsidised, finance. It was an irresistible combination, made the more compelling by the fact that the bank's risk controls appear to have been so lax.

WestLB is a fairly typical German Landesbank in being 43.2 per cent owned by the regional government, North-Rhine Westphalia, with the balance held by a legion of local municipalities and savings institutions.

The model is still fundamentally the same as it was in the immediate post-war period of German industrial revival; the central purpose is to foster regional development and provide support to a myriad of local savings institutions. There's hardly any margin on the retail activity, while the money is lent out, long-term and cheaply, to finance the greater glory of German industry.

Mr Sengera wanted to bring the bank into the 21st century by expanding its international commercial operations, but back home the pressures have been building. British and American banks have been able to protect themselves from the business downturn through their high-margin retail operations, and by reducing the risk of their corporate lending through securitisation, syndication and derivatives.

With no retail banking profits of any significance to fall back on, the German banks have been hit hard by mounting bad debts in the corporate sector. Strong local political and commercial links mean many of these rotten loans are already going unrecognised as the full force of Germany's economic slowdown hits home.

Into this maelstrom of existing structural problems marches the American temptress, in the end more damnation than salvation. Yet the reactionary forces of the state of North-Rhine Westphalia that have made Mr Sengera pay for it with his job have achieved no more than a Pyrrhic victory. Like so much else in Germany, the banking system is in urgent need of reform to bring it into line with the realities of today's commercial world. Principal finance may not have been the answer, but nor is burying your head in the sand.

Unilever warning

Oh dear. Unilever, a symbol of reliability and stability through the downturn, has slipped on the most obvious banana skin of them all - misleading market expectations. At the quarter year stage, Unilever admitted that it had failed to meet ambitious revenue growth targets of 5-6 per cent, but said it would make them for the year as a whole. Now, with another three months under its belt, it admits that growth will be no more than 4 per cent.

Still, no matter. The Path For Growth cost saving programme is set to exceed plans this year, which means that the earnings outlook remains unchanged. The stock market decided not to give Unilever the benefit of the doubt, and the shares took the most terrible punishment, slumping 11 per cent.

Yet the greater fear is not so much that Unilever's forecasts cannot be believed as that the weakness in demand yesterday's warning points to is indicative of a wider slowdown in consumer confidence and spending. And if that's the case, what does it say about the still nascent stock market recovery? Unilever is a bellwether of the US and global economies. A revenue warning from one of the world's corporate giants at a time when the stock market is looking for a recovery in earnings, not a further retrenchment, is simply not in the script.


I'd wanted to write a more critical retrospective about Sir Edward George, Governor the Bank of England, than the largely gushing ones we've had thus far, but having thought about it for a week now, the inescapable conclusion is that it's just not possible. Whether by luck, good judgement, or a mixture of the two, Sir Edward who retires next week, has presided over one of the most remarkable periods of economic prosperity in modern British history - a 10-year stretch of subdued inflation and uninterrupted growth. You can argue about the validity of some of the individual interest-rate decisions, or indeed their import, but the long-term record speaks for itself.

I can think of really only one obvious misjudgment - Sir Edward's resistance to the break-up of the Bank of England, separating its regulatory from its monetary functions. This has turned out to be a blessing in disguise, yet at the time Sir Edward thought about resigning over the issue, which he thought policy on the hoof and a threat to the Bank's authority in the City.

It was certainly the former, but it was the very reverse of the latter. The Bank's supervisory function was constantly getting it into trouble, once under Sir Edward's very own nose, when Barings went belly up. He was also deputy governor at the time of the BCCI collapse. The Bank is still the subject of litigation on both counts.

All banking failures involve a degree of regulatory failure. BCCI and Barings were no exceptions. By the same token, however, no banking supervisor will catch everything, and the risk of leaving supervision with an independent Bank of England was that however successful the Bank managed to be with monetary policy, it was always in danger of being discredited by regulatory cock-up.

Sir Edward's anger at the initiative was more to do with the fact that he hadn't been consulted, and therefore felt that he may have misled his own staff, than that he thought it a bad idea per se. But no doubt there was an element of institutional defensiveness in it too.

In the end, Sir Edward's deputy, Sir Howard Davies, went off to do the regulatory bit as head of the Financial Services Authority, and with the benefit of hindsight, there's no doubt about who drew the short straw. In truth the FSA has been a success at least equal to that of the independent Bank of England, but after one of the worst bear markets in living memory, it has also become the butt of constant carping and criticism. There could hardly be a greater contrast than that between the glowing tributes afforded to Sir Edward and the Bank of England, and the altogether more downbeat assessments of Sir Howard's reign at the FSA, which also comes to an end this year.

It's unfair, but then macro economic management through monetary policy always was likely to be a doddle against the micro management of regulation, where it is only the failures that get noticed and where there is either too much or too little regulation, but never just enough.