Not so greedy? Banks vie for low-paid state work
Investment banks are vying to advise governments on the bailouts of troubled financial companies as they contend with a slump in fee income from the now quiescent mergers and acquisitions market.
While this type of work attracts comparatively low fees, the investment banks also have an eye to building their pool of governmental contacts, and potentially cashing in on the follow-up work further down the track.
“It’s about power and influence,” said Duncan Angwin, lecturer at Britain’s Warwick Business School and former senior merchant banker specializing in cross-border mergers and acquisitions (M&A).
“Banks are so central, particularly to our economy, that they need to be involved at the heart of things so that they can influence the outcome in a favorable way,” he said.
As the global financial crisis has deepened, authorities have taken shares in banks and recapitalized them, thrown massive amounts of money into frozen money markets and acted to revive their economies at a cost of some $5 trillion.
Meanwhile, Thomson Reuters data shows the global value of M&A deals has fallen 30 percent to $2.798 trillion this year, putting investment banks’ revenues from lucrative advisory fees under pressure.
Now, investment banks, whose business it is to advise on M&A and to underwrite capital market transactions, are keen to lend governments their services, despite the less-than-lavish pay.
The British government has pumped 37 billion pounds ($55.93 billion) of taxpayers’ cash into three of Britain’s biggest banks, Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz), HBOS (HBOS.L: Quote, Profile, Research, Stock Buzz) and Lloyds (LLOY business card.L: Quote, Profile, Research, Stock Buzz), by agreeing to buy shares in them.
Credit Suisse (CSGN.VX: Quote, Profile, Research, Stock Buzz) said it is advising the Treasury on the subscription of shares in the three banks and on the merger between HBOS and Lloyds, while Deutsche Bank (DBKGn.DE: Quote, Profile, Research, Stock Buzz) has been appointed as adviser on the banks’ recapitalizations.
“We conducted a competitive tender process involving a number of candidates,” the Treasury said in a statement, declining to comment further.
Between them, Credit Suisse and Deutsche Bank are charging a nominal $3.7 million for their work — or just 0.01 percent of the acquisition value, joint estimates by Thomson Reuters and Freeman & Co showed.
This compares with an estimated $110 million to $130 million financial M&A advisers received from the three banks that acquired Dutch peer ABN Amro for about 70 billion euros ($90.12 billion) last year — a fee equivalent to between 0.12 percent and 0.14 percent of the deal value.
FRUGAL GOVERNMENT
A government source said the Treasury tended to pay less for advice than the private sector, keen to avoid any extra costs as it is already spending huge amounts of taxpayers’ money on saving the national financial system from collapse.
While advisers may be charging the government low fees, the contacts they build now mean they stand to benefit from further advisory work once banks divest their shares.
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