Morning Coffee: The HSBC bankers who lost $400m got Apollo to do the work. Safest jobs at the Big Four are no longer safe
The financial cycle, particularly in private markets, is an ebb and flow of trust. When things are good it’s “my word is my bond” and when they go bad it’s “only the paranoid survive”. As long as we stay away from the real crisis situations where nobody believes anything, the system is broadly self-stabilising. And it couldn’t really be any other way. It’s simply not possible for a bank of any size to double check everything its counterparties tell it; nothing would get done. The occasional misunderstanding is part of the cost of doing business.
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While valid, old wisdom like this probably doesn’t make it any more comfortable, if you’re HSBC CEO Pam Kaur, to stand up and explain that your bankers lost $400m in the Market Financial Solutions bankruptcy. Although the bank didn’t have any direct exposure to the extravagantly bust mortgage broker, it had extended “back leverage” to Atlas SP Partners, a unit of Apollo inhabited by people it bought from Credit Suisse.
This form of lending sits somewhere in the private credit structure, involves lots of intermediate SPVs with names like “Zircon Bridging” and “AGF-WHCO-1-A5”, but basically seems to have the economic meaning of “non recourse, HSBC is on the hook for the losses”. And, painfully, in the words of Kaur herself, HSBC had relied on “the financial sponsor’s due diligence”. Worse, HSBC reportedly did so even though 80% of the value of the loans made to MFS from Atlas came from the bank itself.
Ouch. It’s likely to be particularly annoying, since HSBC is well aware of the existence of this kind of risk. Only last year, Kaur also said: “It is always the second- and the third-order risks that you should be very mindful of, which are not your direct exposures, but exposures you may have through weaker counterparties.” And the principle of “skin in the game” is fundamental to the trading of loans. You shouldn’t rely on someone else’s due diligence, if that person’s incentives are significantly affected by the fact that they’re passing the risk on to you.
But, this is the world of financial sponsors business, where the rules aren’t the same as traditional banking. The fact that the word “bridging” appears prominently in the deal structure suggests that this might have been seen as more of an underwriting exposure than a principal risk for HSBC. And if that was the case, the name of the game is speed, volume and diversification rather than detailed analysis of every deal. It would mean that it’s likely that Apollo would have been doing the due diligence for every counterparty, not just HSBC, and also that while it’s never nice to lose money, the franchise depends on being reliable as a participant in every deal.
On the other hand, this kind of excuse tends to come up in every cycle, along with the cliché about being in “the moving business, not the storage business”. Underwriting losses are inevitable, but they shouldn’t really be reaching nearly half a billion dollars. This episode is unlikely to budge the stereotype of financial sponsors bankers as having some of the highest ego to talent ratios in the industry. And it’s a lesson to us all that the best approach is that of Ronald Reagan – “trust, but verify”.
Elsewhere, the implicit deal at accounting firms has always been that you can either take the more interesting and well paid advisory and consulting work, or you can have a job for life in audit. Advisory is highly cyclical; it’s often downstream of the M&A industry, but audit is one of those products like toilet paper or car insurance – people have to buy it whether they want it or not. But someone at KPMG doesn’t agree with this.
Back in March, KPMG UK announced that there would be more than 500 redundancies. And of those, only 120 are on the advisory side; more than 400 “assistant managers” in audit are scheduled for headcount reduction. It seems that the auditors could hardly credit this; when the email went out, it took a while for them to understand they were included.
What seems to have happened is that people may have taken the “job for life” thing a bit literally. KPMG’s audit revenues are up 5% while advisory is down 3%, but attrition rates have gone through the floor. Having made plans based on the assumption that at least some junior accountants would head over to the client side or otherwise leave, KPMG has found itself with too many of them. Nothing’s certain any more.
Meanwhile …
Although the KKR 50th birthday celebrations were apparently “not short on self-celebratory grandeur”, Henry Kravis and George Roberts did admit that they had it somewhat easier than today’s bankers, back when mismanaged companies "that didn't make sense" could be bought for 10 times earnings. (FT)
Graziano Gemma has gone from Goldman Sachs’ middle market team in Italy to be the country head of investment banking at Bank of America. (Financial News)
Anthropic is selling its latest suite of tools on the basis that they will automate “the tedious work”, but if they can really do market research, forecasting and prepare for client meetings, they’re really getting quite close to activity which would require regulatory authorisation if it was a human being doing it. (Business Insider)
But it seems that if you want to use artificial intelligence to beat the stock market, you have to spend the serious money, do an astrophysics PhD and put the work in to build a proper algorithmic trading system. So far, all the LLM-based contenders seem to underperform badly, and many of them actually lose money. (Bloomberg)
After David Benichou went to Goldman Sachs, Morgan Stanley have gone for internal promotion and two co-heads of investment banking in France. Alexandre Bartolin will continue to lead the EMEA transportation and infrastructure team, while Frederic Proust moves up from COO and head of FIG. (Bloomberg)
A slightly terrifying academic study seems to find that even brief use of an AI chatbot to solve simple problems makes you worse at solving them yourself and more likely to give up. (WIRED)
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