The Standard Chartered Bank plc saga, part I

I will not be alone in saying that the Standard Chartered Bank’s compliance problems with the New York State banking regulator (Department of Financial Services - DFS) caught me by surprise. 

I have been following this bank for several years, as it seemed to provide straight forward banking services internationally and made a good return in so doing.  Management seemed quite competent.  Finally, the fact that it had acquired what remained of American Express Bank Ltd. where I spent the first 16 years of my professional career added to my interest.  Actually, I was looking for a good entry point to invest in its stock.

However, the misdeeds that it allegedly committed and apparently did not contest as well as what has transpired so far about its senior management’s conduct have led me to suspend any investment attempt.

Essentially, the bank was accused of willingly defying US regulations forbidding banks to channel money of sanctioned countries such as Iran through the US.  The DFS accused it of laundering more than $250 billion over several years through its US banking operations, of falsifying internal records to prevent regulators from tracing the identity of its Iranian clients and of filing untrue reports.  That a major bank decide, in a very big way, to defy the laws of its host country is simply baffling.

The reaction of senior and top management in this whole affair further raised alarm bells in my mind.  There was of course the now infamous email exchange between the Head of US operations and his superior in which the former clearly outlined the dangers of the bank’s course of action and the latter replied “who these f*** Americans think they are to tell us what to do”.  There was also the truculent initial response to the DFS action stating that only $14 million of transfers had been mishandled and that the bank was contemplating countersuing for damage to its reputation!  This from a bank that had been under Federal oversight from 2004 to 2007 for money laundering.  Then, in short order, the bank agreed to settle with the DFS, paying $340 million and accepting renewed oversight.  As Butch Cassidy asked the Sundance Kid in the eponymous movie, “Who are these guys”? 

What is worrying in this case is that this is not an instance where a low level trader decides to go rogue.  It is likely that the decision to continue doing business with Iran was vetted by the very top management; the Board of Directors was probably at least aware of the decision/policy, and if it was not, then more serious questions must be asked.  What management decides to choose Iran over the US?  What kind of senior manager blurts out the f*** word when referring to the Congress of a host country?  So far, I find no reassuring answers.  Either we are dealing with a culture or a strategic problem. 

The cultural hypothesis is that the top echelons of the bank include throwbacks to the Indian days of the British Empire, except that New York is not a remote outpost in the bush.  When a senior manager not only refuses to listen to his country manager’s cogent alert and advice but also responds with unrestrained fury, when the corporation lets it be known of its intent to counter sue its regulator for damage to its reputation, under the circumstances, I, for one, wonder about the culture of the place.

The strategic hypothesis is that the bank’s main focus is emerging markets, many of which, by definition, are less closely regulated than developed ones, often condone business practices which would be frown upon elsewhere, and in some cases are governed by regimes which are not models of good behavior.  New York is important to the bank for providing access to the US dollar system, but the Americas-Europe-UK segment accounted for only 10% of Standard’s operating income in 2011.  In that sense, and in my view, the bank probably has a higher risk profile than generally acknowledged.

Bottom line, the US regulatory and judicial process is not over by a long shot as the Federal Reserve, Treasury and the Justice Department are still to conclude their own enforcement actions.  I am among those who applaud the DFS decision to go public and break the apparently stalled multi-party negotiations.  I found the allegations against the bank shocking (called me an old-fashioned banker). 

Finally, having myself spent most of my banking and investing careers in emerging markets, I have come to the conclusion that the Standard Chartered business model is riskier than previously thought, and more importantly, that such higher risk profile is unlikely to be easily reduced. 

At some point under the right circumstances and at the right price, the bank may become an interesting investment or trading idea.  

Swimming interlude: Perfidious Albion

As far as I can remember, we the French have had a trust issue with the Brits.  Perhaps centuries of national conflicts, armed or diplomatic, explain that.  This gap extends to the sports arena.  I remember in particular a famous Irish rugby referee in the 60s who was renowned for applying the advantage rule so as to improve the flow of the game, except that to us French it seemed to flow only one way, against us.  But now, as an American citizen, I have the feeling that perfid Albion may reach over the Atlantic Ocean.

I am talking about the debate as to whether Michael Phelps is the greatest Olympian ever.  Please note that the term of reference is Olympian, not athlete.  It is very difficult to compare athletic achievements across the ages and across disciplines.  But it seems to me that Phelps may well be the One, and if he is not, is as likely to be as anyone else.

I was therefore surprised by the reaction of two famous British athletes who perhaps thought they should be considered as candidates for the title.  Sebastian Coe, one of the great middle distance runners of the 1980s with two Olympic gold medals in the 1500m and two silver in the 800m, declared that, in his view, Phelps probably was not the greatest.  He mentioned sprinter Jesse Owens, rower Steve Redgrave, decathlete Daley Thompson and gymnast Nadia Comaneci as candidates for such title, and, tongue in cheek (?) stopped short of perhaps nominating himself.  Lord Coe is the Chairman of the London Olympics Organizing Committee.  There is no question that each one his nominees had extraordinary Olympic achievements, but why they should be considered and Phelps shouldn’t is a mystery to me.

Steve Redgrave realized the "massive" feat of winning a gold medal in rowing in five consecutive Olympics.  This has to rank right up there among the greatest Olympic achievements.  As one who did varsity crew in college and rowed for the Bataillon de Joinville, I have particular respect for the fact that three of these gold medals were won in coxless pair, the most technically challenging boat of all. But when Sir Steve muses, with typical British slyness (Frenchly speaking) that Phelps’ feat would have been more impressive if he achieved it over six or seven Games, one is not sure how to react.  Yes, rowing is brutal.  Having done both sports, there is no doubt in my mind that a 2000m rowing race is more draining than even a 400m medley or a 1500m free swim.  You can’t therefore row multiple events. 

But training to swim middle distances, not to mention different strokes, is far harder mentally, and perhaps physically, than training in crew.  While Olympic level rowers can take some time off and remain competitive, swimmers can’t, witness Phelps’ difficulties in 2010 and 2012.  This is why no swimmer can remain at the top over a twenty year period.  Physiologically, it is also impossible for a 40 year old middle distance swimmer to beat 20 year olds, unlike in rowing.  Witness Janet Evans’ attempt to qualify in the 400m and 800m free this year.  Dara Torres’ swimming career did span 24 years and at 41 she came within 1/100 of a second of winning gold, an extraordinary feat.  But that was in the 50m free.  Dawn Fraser, the all-time great Australian sprinter, could have won gold in four consecutive Olympics had the Australian Swimming Union not banned her for 10 years for pulling  a prank at the 1964 Games.  Even then, I doubt she could done it again in ’72.

As Lord Coe noted, who is the greatest will be debated in pubs for a long time.  As this argument is starting, it is striking, although perhaps not so surprising, that great athletes, such as Sebastian Coe and Steve Redgrave, have big egos; after all, you have to believe in yourself to succeed.  I think that Michael Phelps has a very good chance to be the best Olympian (so far), as he combines durability with domination, eclectism with the sheer number of medals won (mostly gold).  But he also has a quality which is necessary in order to be considered an all time great Olympian, and that is class.