Not waving but drowning?

29 March 2023

I couldn’t sleep the other night and so I put my earphones in, picked up my phone and scrolled through recent episodes of the excellent “In our Time” on BBC Sounds.

I couldn’t sleep the other night and so I put my earphones in, picked up my phone and scrolled through recent episodes of the excellent “In our Time” on BBC Sounds.

I fell upon the edition discussing the works of quirky poet Stevie Smith. It’s a great programme and I commend it to you thoroughly.

Her most famous poem is strangely evocative and begins:

“Nobody heard him, the dead man,

But still he lay moaning:

I was much further out than you thought

And not waving but drowning

The reason why this makes you catch your breath, I believe, is that it powerfully conjures up the image of someone out at sea who is waving to shore - but who is actually drowning.

Could this be a metaphor for some of what we have been seeing in the business world over the last few weeks? It has been a strange period with a lot of angst, seemingly appearing out of a clear blue sky.

Aside from the demise of Silicon Valley Bank and Signature Bank and the shotgun marriage of UBS and Credit Suisse, examples include:

  • a series of announcements from London listed companies that they are planning to move their listings to New York, leading to anxiety around the future of the London listed market;
  • a heady roller-coaster ride for Adani shareholders; and
  • the stuttering execution of the proposed split of EY into consulting and audit.

There is a sense of fragility out there and it might be worth looking at the above examples to see if there are useful takeaways.

SVB and Credit Suisse

Many column inches have been written about the fate of these institutions. Massively simplifying things:

  • SVB fell victim to a bank run when recent steep rises in interest rates exposed the unrealised losses in its bond portfolio; and
  • against this apprehensive background, Credit Suisse never really recovered from the delay in publication of its accounts and the rather astonishing disclosure that there were “material weaknesses” in its controls framework.

Aside from the self-evident point that confidence is all in the banking business, and once forfeited is tough to recover, I would highlight three points:

  1. Painstaking governance matters, perhaps disproportionately, in large financial institutions where the devil will often be in the detail. As Andrew Edgecliffe-Johnson points out in the FT “Should investors have fretted that just one of SVB’s independent directors had serious banking experience…and that he did not sit on its risk committee. (One director who did brought “deep experience in the premium wine industry”).” Meanwhile at Credit Suisse, the Chief Investment Officer of Harris Associates, a long-time investor in Credit Suisse is quoted as observing that during the years 2011 to 2021 Urs Rohmer was chair of the Board and “…the Board was not independent enough and strong enough to challenge him”.

  2. The zeroing of the Credit Suisse contingent convertible AT1 Bonds is a bracing reminder that risky hybrid instruments paying 7% can be, well, risky. There seems to be general outrage that the AT1s were wiped out while equity holders got $3.25bn but, as the excellent Matt Levine says in an article for Bloomberg: “I’m sorry but I do not understand this position! The point of this AT1 is that if the bank has too little equity (but not zero!), the AT1 gets zeroed to rebuild equity! That’s why Credit Suisse issued it, it’s why regulators wanted it, and it would be weird not to use it here.”

  3. Worryingly, on each side of the Atlantic carefully crafted resolution plans for SVB and Credit Suisse were discarded. The US authorities decided to depart from the standard FDIC resolution procedure for failing smaller banks and, instead, pay all the uninsured depositors. Credit Suisse meanwhile had a “Swiss emergency plan” in place, which was presumably not a fire sale to UBS. Whilst one can understand the pressure that regulators would be under in these circumstances to maintain confidence in the banking system, it is still pretty odd that plans carefully crafted to deal with this type of crisis are, in the heat of a BIG moment, cast aside. The result is two-fold;
  • thoughtfully designed loss absorption mechanisms are altered so as to move, as in the case of SVB, losses from immediate stakeholders to the taxpayer; and
  • this surely brings moral hazard with it. Might the managers of tomorrow’s SVB be a touch more risk-seeking if they think that the State will bail them out?

Listings moving to New York

I was listening to Jon Ronson on Desert Island Discs this morning and one of his choices was Simon and Garfunkel’s wonderful “America” - “…they’ve all gone to look for America”.

There is some of that going on in the world of UK listed entities. Before the consuming distractions of SVB and Credit Suisse, the talk of the London market was the announcement by Flutter, CRH and WANdisco that they were considering US listings, following in the footsteps of Ferguson. Anxiety was further ramped up by the news that even Shell had looked at it and the Arm would re-list in New York and not London.

None of this is good news for the once-vibrant London equities market. But it is an understandable move for companies with significant American earnings. Valuations are up to 30% higher and it is a much more liquid market. As Oliver Shah points out in his Sunday Times comment piece, the average traded volume on the London market in January 2023 was £3.7 billion, down from £8.6 billion in 2007 - and to put that in perspective Tesla (the most traded US stock) does about £32.5 billion per day.

Moving to the New York Stock Exchange is not, however, easy and a bed of roses does not await new arrivals. It involves adopting US accounting standards and compliance with Sarbanes-Oxley and, whilst these may be bearable, the big uncertainty is whether the entity can gain admission to the S&P 500.

Unlike the FTSE 100, this is not just a function of having a bigger market capitalisation than others.

There are a range of requirements around being “American enough”, such as having a plurality of revenues and assets in the US and a threshold of liquidity, but critically a lot of discretion sits with the “index committee”. So Ferguson have not yet gained admission a year after switching its primary listing. That’s not a disaster, but it’s not optimal to be an index orphan.

Despite these challenges we must assume that London will lose more big listed entities to the States and, indeed, that large floatations which traditionally would have come to London will be seduced by New York. The economics look compelling and senior executives can look at much bigger salaries, given that US benchmarks are so much higher.

There have, of course, been all sorts of reviews aiming to improve the attractiveness of London listings (eg allowing dual class share capital and SPAC-style structures) but there is a definite feel of not waving but drowning here. It’s an uphill struggle but we surely need real pace in changing some fundamentals:

  1. easing risk-weighting rules to make it easier to hold UK equities and accelerating the review of the MIFID II rules which have so eviscerated analyst research of FTSE companies (as Oliver Shah observes);

  2. moderating the burden of UK corporate reporting rules (HSBC’s latest Annual Report runs to a heady 432 pages); and

  3. convincing fund managers that they can, in appropriate cases, agree to reward packages for leaders of UK that are comparable to those which are available in the US.

Hindenburg and Adani

India watchers were transfixed by the fallout in late January and early February from short seller Hindenburg’s highly critical report on the Adani Group. Losses for Adani stocks reached more than $100bn and an equity issuance was cancelled.

Given that Gautam Adani is a shooting star in corporate India, and apparently close to Narendra Modi, this was major news. Might it lead to problems for financial institutions and others with exposure to the Adani Group? Might it, moreover, unsettle broader investor sentiment about corporate governance in India?

In the period since, Adani has worked hard to steady the ship and the answer for the moment to those questions seems to be “No”. Shares have been issued to a supportive investor, there has been some modest debt reduction and new capital investments, beyond those it had already pledged, have been paused until September 2024. The share price of Adani Enterprises has risen 45% in the last month.

It seems that investor confidence in Adani is returning although the share price still has a long way to recover compared to pre-Hindenburg levels. It will be interesting to observe developments from here after what looks like a near drowning experience. As the Economist wonders aloud, will Adani’s loftier ambitions for long-term expansion have been tempered?

What is going on at EY?

The split of the EY, with its 13,000 partners around the world, into consulting and audit firms, Project Everest, was announced last September. It sounded mega-complex. Even so, given the importance of “I’ve started so I’ll finish”, it was a surprise to hear that it was being put on “pause” earlier this month.

An FT interview last week with Julie Bolland, who runs EY in the USA, suggests that there are significant divisions between the US and the non-US partners. Other commentary attributed to EY insiders in the FT article mention “unresolved issues” such that “the Project Everest transaction may be in jeopardy.”

This could have happened any time of course - people business, hugely complex deal. But, particularly in a tense business climate, for a major audit and advisory firm to be publicly at odds with itself over this core strategic transaction is not a great look. Clients, partners and all other stakeholders will be on edge.

There is a leadership moment here and time is surely of the essence.


Stevie Smith’s poem is, of course, quite dark but it does seem to me to catch the mood of an apprehensive moment for business.

It will pass, of course, and to help us on our way I attach Jon Ronson’s final choice, Springsteen’s Jersey Girl

Christopher Saul

Christopher Saul provides independent trusted advice to senior executives and key stakeholders within publicly quoted and privately owned businesses and professional service firms. His areas of focus are governance, succession and the moderation of differences.

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