The Financial Times reports on how the fearsome have fallen.
(emphasis mine) [my comment]
The fearsome become the fallen
By Peter Thal Larsen and Simon Briscoe
Published: March 22 2009 18:32 Last updated: March 22 2009 18:32
The worst financial crisis since the second world war has not only forced governments across the western world to step in and rescue giant institutions. Amid the turmoil, there has also been a tectonic shift in banking's centre of gravity.
A decade ago, a list of the world's largest financial institutions was dominated by banks from the US and UK. Today, just four of the top 20 have their headquarters in the US, still the world's largest economy. HSBC, at heart an emerging markets bank, is Britain's sole representative. [See graphics below]
After writing off more than $1,000bn (€734bn, Ł691bn) on complex debt instruments and raising hundreds of billions of dollars in fresh capital, many banks have watched their market value shrink to a fraction of its level at the peak of the boom.
Looking back 10 years, the banking industry in early 1999 was still dusting off the debris of the previous autumn, when the Asian economic crisis and near-collapse of Long-Term Capital Management in the US left some banks nursing large losses. Though few recognized it at the time, however, the industry was at the beginning of an eight-year growth spurt that would ultimately bring the world financial system to the brink of collapse.
The most striking are the fallen. Citigroup, which dominated the landscape for most of the past decade, now languishes at the bottom of the list and is in effect under government control. Lloyds TSB is now too small to register after its ill-judged rescue of HBOS.
New names have meanwhile arrived as if from nowhere. This is partly a reflection of shifting economic power: China's three big banks dominate the rankings after joining the stock market in 2006 and 2007. Australian and Brazilian banks have also risen to prominence. But the shifting composition also offers evidence of how well different countries have managed their financial systems. Canada, for example, has been praised for its risk-averse approach to regulation. A decade ago, no Canadian bank made the list. Now there are five in the top 50.
Nevertheless, a comparison of the two snapshots masks the destruction of value since the crisis began. Even relative winners have not fared well: HSBC's stock market value peaked at $234bn in October 2007 [HSBC is not a winner. Its short position in gold guarantees its demise]. Today it is worth just one-third of that amount. China's three largest banks have halved in value over the same period.
Does the experience of the past decade offer any pointers for banks hoping to thrive through to 2019? On the face of it, there are few strategic lessons to be learnt. A decade of rapacious consolidation has made JPMorgan Chase the world's largest bank outside China [JPMorgan has the world's largest gold short position, and it is surviving on borrowed time].
But Royal Bank of Scotland, which was also aggressively acquisitive, is controlled by the British government and now valued at significantly less than the Ł20bn ($29bn, €21bn) in fresh capital that the state pumped into the bank last autumn.
When the crisis eases and confidence returns, valuations are bound to recover [Wrong. The dollar will collapse before credit markets recover, so toxic US securities trading at firesale prices will never recover]. But regulation will be more muscular and governments more willing to slap down signs of excess.
Banks may also be forced to become smaller and more domestic. Taxpayers, who have been shown to be the ultimate guarantors of the financial system, are bound to be less tolerant of global giants whose collapse could overwhelm their home countries' fiscal resources [Agreed. Bankers are not going to be too popular for a while]. Not until the current crisis has faded from memory will banking be ready for another
Make of break: The deals that drove groups' fortunes
In 1999, Citigroup was the newly formed colossus. Conceived by Sandy Weill as a one-stop financial supermarket, it heralded a world dominated by a few big institutions. But Citi's fall has been steep. As catastrophic losses prompted multiple bail-outs, this month its shares briefly dropped below $1.
Today's league table is dominated by China's three largest banks: Industrial and Commercial Bank of China, China Construction Bank and Bank of China. Floated on the stock market in 2006 and 2007, their shares have held up better than those of many western rivals, though they have little clout beyond their home markets. The slowing Chinese economy will provide their first big test as public companies.
Not long ago, Bank of America was challenging Citi for its crown. But the pride of Charlotte, South Carolina, has slipped following i ll-fated acquisitions, particularly its absorption of Merrill Lynch last summer. At first, that deal looked like a masterstroke for Ken Lewis, BofA's chief executive. But Merrill's wobbly balance sheet forced the bank to seek a government bail-out.
Lloyds of the UK is another tale of a mistaken deal. The world's fourth-largest bank in 1999, its ranking fell during the boom as a cautious approach to risk produced dull growth. Lloyds was poised to benefit from the crisis but a hurried merger with rival HBOS last year left it holding toxic assets, forcing it into government control. [What is the point of being cautious for years and then throwing everything away in one hurried merger?]
Ten years ago, JPMorgan was in danger of slipping out of the top league. But two mergers, with Chase Manhattan in 2000 and Banc One in 2004, created a bank that has weathered the storm better than most. Under the leadership of Jamie Dimon, the bank has rescued Bear Stearns on Wall Street and Washington Mutual, a mortgage lender.
Spain's Banco Santander is another successful predator. Under Emilio Botín, its indefatigable chairman, acquisitions have taken it into Latin America, the US and — following the takeover of Abbey National in 2004 — the UK. A focus on retail banking means it has suffered less than most.
Goldman Sachs continues to defy the odds [No it doesn't. It got a $10 billion taxpayer bailout and another $13 Billion via taxpayer bailout of AIG.]. Many bankers doubt Goldman will be able to stand alone for much longer. Then again, that is what they were saying 10 years ago.
Below are two screenshots from the interactive graphic associated with the Financial Times article above.
Top 20 financial institutions by market capitalization in 2004
US banks: 11
British banks: 4
Japanese banks: 2
EU/Swiss banks: 3
Chinese banks: 0
Canada/Australia/Brazil banks: 0
Top 20 financial institutions by market capitalization in 2009
US banks: 3
British banks: 1
Japanese banks: 1
EU/Swiss banks: 4
Chinese banks: 5
Canada/Australia/Brazil banks: 6
[These fun graphics show the changing world fortunes of financial institutions, specifically the loss of importance of the US and UK in global finance. Click on link to play around with the interactive graphic.]
My reaction: the dramatic shift in banking's centre of gravity over last decade is a reflection of the world's shifting economic power. Looking at the changing market capitalization of banks is a good way to see where political and economic influence is being lost or gained.