Round Table Participants:
NICK ALEX, SVP, SunTrust Treasury and Payment Solutions
JON ALVARADO, Treasurer, Plantronics
FERDINAND JAHNEL, Treasurer, Henry Schein
JIM MAHN, Vice President, Industrial Sales Group, JPMorgan
SASCHA PETRUSEV, Vice President, Deutsche Bank
Business Finance: Tell us about your banking relationships and how the relationship-building environment has changed in light of the economic crisis. How have the criteria that you use to assess the value of a banking relationship changed?
Alvarado: I would say that we've had a pretty solid foundation of financial institutions. We always wanted to be with quality banks, and so there's always been this search for quality, and to make sure that we've had institutions that could meet that need …
This has led to a stronger flight to quality. I have found that the credit default swap (CDS) has been an excellent instrument for being able to see in advance institutions that were in trouble that either went under or had been acquired. We really started watching the CDSs after the Bear Stearns collapse. The CDS had been one metric where we had seen banks go from roughly an average of 75 to 125, with European banks making up the lower portion. We saw Bear Stearns increase to 750. So they had really broken out of the pack four-, fivefold above all the other banks, and it just seemed to be just a matter of time before it was acquired.
After that we started to see the whole metric shift, and everybody increased above 100, then up to 200. Some started hitting 300 with, again, a couple of banks breaking out of the pack. We saw Lehman and Merrill hitting sort of that 600 to 700 range, and again, you start to see, I think, that pattern from Bear Sterns start to play out again. And it wasn't very long before Merrill Lynch was being taken over, and then Lehman went bankrupt. This then led to a run on and subsequent collapse of The Reserve Primary Fund.
We then saw Washington Mutual's CDS rate increase to 3,880, and you just knew that this was really in trouble. Wachovia was in the 1,000 range, and both firms were taken over.
So for me, the credit default swap became an excellent indicator to just see which firm was under pressure; it gave me some reassurance that other banks were holding up very well …
BF: How are the banks doing? Are they stepping up and supplying the types of services and information you need, are they being responsive?
Alvarado: We were looking for more open dialogue so that if there were problems, we wanted to know — which is not something that they were forthcoming with. Every bank has been saying — even Wachovia — that “everything is fine.”
So I don't think that I've been getting an accurate picture of what was going on behind the scenes.
I had a very good meeting with B of A, who really emphasized the strengths of their balance sheet to meet their clients' liquidity needs. This was important to be able to prevent a run on their bank.
But when all these dynamics keep happening, you start to realize that this is much bigger than we are aware of. And I've taken the view that we may see more banks being acquired or possibly collapse. I don't know if it's going down the path that occurred in 1929, but it is a definitely dangerous time right now.
Petrusev: Clients are asking us, “How secure is the bank?” They're asking for our credit and our credit default swap (CDS) rating. They want to know, “How secure are our deposits with your bank?”
Also, if they have a credit line, they are asking if the bank is still committed to this line and whether credit lines are in jeopardy of being reduced. What clients were requesting two years ago — or even a year ago — was completely different. Clients were mainly asking about our products, the feature functionality, and our commitment to investing in technology. Currently, the main focus is on the security of deposits, followed by product-related questions.
Mahn: One thing that we have stressed is the importance of getting out in front of clients and having those conversations. All of our people recognize how critical it is to be communicating with clients in order to fully understand the issues, because each person in this room is going to react to it differently. Each client is going to have a different issue that needs to be addressed, and simply creating a product or offering a creative solution is not necessarily the answer. We need to find out what you need to know so that we can better understand how to provide you with the answers. And once we have that knowledge, we are able to share that collective wisdom among our client base.
I think that the worst thing we can do as an organization is to act in a way that appears reactive. So I think that we need to take a more thoughtful approach and say, “What is the issue? How are we going to resolve this, and how long is this going to last?,” while at the same time constantly examining ways to correct the problem.
Petrusev: There has been a flight to quality. We are seeing increased balances in our Demand Deposit Account and Money Market Deposit Account because clients are looking for the more conservative investment options.
Alex: As a regional bank, we stress our relative strength and stability, but any differentiation is challenging to explain in today's financial market situation. Many of our clients are predominantly middle market in size, and their concerns are more fundamental: “Why should I be concerned about CDS rates? Can you educate me on what a CDS number is, and why I should care?” They ask, “How will the bailout affect our region of the country, you as a bank, and me as one of your clients?”
I think that we find that this interlocking financial obligation scenario (commercial paper, CDSs, insurance based on CDSs) is so complex that it is bewildering for many middle-market and small companies. We therefore spend a lot of our time educating our own associates, both in treasury management and in relationship management roles. We also have to reach out to clients and explain core deposit product details. For instance, we've done several primers on FDIC insurance (what it covers, how much it covers, etc.), and of course this has changed for everybody in the last 3 or 4 weeks.
In this role of calming concerns about the markets, we're often explaining some of the underpinnings of the financial system — things that were taken for granted for so long. I think that we need to focus on proactive communication, reaching out early and often, and being willing to talk in individual client conversations or group conversations like this one.
We talked earlier about syndicated, or multibank, credit facilities. Some clients are concerned that they have lost, or feel they will lose, loan facility participants. I believe that we should talk to our clients candidly about these situations. It's a very fluid environment in which businesses have to manage their credit facilities. I think that a lot of those discussions become very dynamic. You and your clients may think that you understand the market one week, and then there'll be another refinement in the bailout package …
BF: Looking forward from that, how are you perhaps going to rely on your banking partners differently? How is your relationship going to change in terms of how you partner?
Jahnel: I can say that Henry Schein has always had a philosophy that business relationships with banks are conducted with a long-term perspective on multiple levels in terms of services that we can use in a meaningful way. Whether it's credit, whether it's cash management services, foreign exchange investments — all of these day-to-day activities that we have. And advisory as well, as we are an acquisitive company.
We were fortunate that we were able to renew our credit facility just at the beginning of September, basically a week before the Lehman bankruptcy, and were able to secure a 5-year transaction at attractive terms that is going to be very valuable to the company going forward. As you know, these transactions are not available right now, anywhere.
In that process, to establish that facility, basically we had very deep conversations over the summer with those banks that we wanted to target that are either already in a relationship with Henry Schein or that were interested in establishing a new business relationship with us. We wanted to clearly identify beforehand what these banks could do for us on these multiple levels going forward, because we don't want a relationship with a bank just to receive credit and then not see them for five years. It's not meaningful to Henry Schein, it's not meaningful to the banks.
And I think, to the points that my treasury colleagues have expressed before … what I and my team are looking at very carefully and on an ongoing basis is what is the counterparty risk? I mean, this is a subject that, if we were sitting here a year ago, we would have not even thought about.
BF: With consolidation under way in the banking industry, what is this going to mean — and maybe this is a question for the bankers — how are you going to be able to serve your clients at the same level and not become distracted by mergers or whatever?
Mahn: I think that the last thing the banks should be out there saying is that because a competitor is going through a merger, clients should be concerned that they are distracted and therefore they should consider switching partners. Let's face it, the financial services industry is experiencing dramatic change, and all of us work for dynamic organizations that are working at strategically managing that change.
I think that what's important when talking to your financial institution is gaining an understanding of how they handle a merger. How will they ensure that service levels are maintained? How will they become a stronger organization? Other questions might include, How are they deciding what platforms to use, what will be the timing of the changes, and what are the broader implications? In the end, the real issue is whether they are communicating with you on a regular basis about the changes they are making. You should not find out about changes because of something that has happened on the operational side of the organization.
So as far as mergers are concerned, I think that the onus is on banks to make sure that we are out there communicating with clients about what this means to their organization. I don't see this trend ending anytime soon. At JPMorgan, we've had to manage merger-related activity in the last year and have been very committed to communicating with clients what the acquisition means to them.
Alex: It's interesting to think that about a year ago, a group like this might have said, “Well, we'd like the AFP (Association for Financial Professionals) to again push for Reg Q repeal,” right? Reg Q repeal would allow us to pay interest on regular checking accounts. But instead, the government has now done the opposite and created a new “product” — a non-interest-bearing checking account with unlimited insurance. Ironically, this non-interest-bearing account suddenly looks attractive, as you can be sure that you can get a “return of capital,” even though there is no “return on capital.”
So with regard to the federal assistance to banking, I think that the insurance allows it to become almost an orderly transition instead of as it was just a few weeks ago when it felt like a disorderly transition of weak players. I feel that the Fed's provision for all banks to have the unlimited insurance, which the FDIC put in place “free” for 30 days, and then the banks have to opt in or opt out, that action probably gave you some comfort that you had some time to deal with the uncertainty about any of your banks. But over time, I think that there'll be a strong vs. weak separation in the industry despite the unlimited deposit insurance. Some analysts have predicted this for a while, sometimes saying that there are still too many commercial banks, S&Ls, and credit unions in the United States. But I think that this current storm we face may cause — or be — an inflection point.
Alvarado: When we look at what's happening, it was like a shock wave that went through our whole financial sector. When we started to see banks go under, it led to a decline in consumer confidence, not knowing whom to trust, not knowing where to go. And if that leads to panic, we can put so much stress on our financial system that it can have severe consequences.
I think that the banks and government have to realize that no bank can go under; we saw the consequences of that with Lehman Brothers. If they let another bank go under, the counterparty risk that occurs could lead other banks or financial institutions that are exposed to them to go under. Then, if they go under, who follows and what does it then take to stop it?
I think that it has become necessary that the federal government has to step in to support our financial system. It is as if we are all on thin ice financially and the government is there to thicken that ice to keep things from becoming catastrophic.
I think that right now we have to put the survivability of our financial institutions first. We are seeing over a trillion dollars worth of funding being put together around the world to ensure that they survive.
BF: How can corporates and banks together battle fear?
Jahnel: I think that it was unavoidable that another authority like the government and the Federal Reserve ultimately had to step in. It was unavoidable, but whether you like it or not, there was just nobody else left who could really fight that tidal wave happening. Just to what you said before, Jon, I think that if the government and the Federal Reserve had to experience that weekend again, where they decided not to support the Lehman buyout by new banks that were named as being interested, they would probably decide differently today because at this time I think we were not aware of the fallout.
Nobody really realized what that meant in terms of market turmoil and real panic, like you say. It's very true that ultimately it caught a number of other banks and led to this huge intervention that is going around the globe right now.
I would say that you see some of the effects of government intervention happening right now as lower rates are coming in, and the effects of the reserve banks around the globe pumping liquidity into the market is certainly helping. It's a daily battle, there's no question about that. But I don't think that there's just doom and gloom out there. I would be cautiously optimistic that we are weathering this storm and are going through this crisis. We'll see some structural changes for sure. But I think that what then is the bigger question is that while we are definitely going into a very strong recession in the U.S., and Europe as well, as well as the emerging markets, how long is it going to take to get out of this? That's the big overriding question ultimately.
Alvarado: There's another consequence that I think that we haven't really seen play out yet. With the lack of confidence, with the sort of fear of being in the market, there has been this flight to quality. And here in the U.S., the only thing that you can really deem to be of safe quality, where you can turn to your senior management and to your board and say, “I'm invested in something that I believe can guarantee preservation of capital and liquidity,” is the U.S. Treasury bill.
Companies around the country have been buying treasuries to the point where they have driven rates to zero with little to no product availability. And they're saying that they're going to come out with a $900 billion package, and it will be probably issued out in Treasuries — the market could absorb it in a very short period of time. We are literally seeing Treasuries at zero, and people are lining up to buy them.
But that money's coming in from other investments. Those investments are government obligations, munis, bonds, and prime funds that corporations are getting out of.
We have seen UBS, B of A, and Royal Bank of Scotland offer to purchase back their portion of the $92 billion in ARS student loans.
BF: What is it exactly that you would hope that corporates will remember two years from now — after we hopefully have crossed through these uncertain and challenging times — about your services?
Mahn: I've actually covered the automotive industry, as well as the airline industry, which have obviously gone through some challenging times in the past. And, as I think back now on the positive feedback we received most frequently, it was “You kept us informed.” “You were there for us, not only providing information, but also understanding our business and understanding where we needed assistance, and what we needed to do to come out of this successfully.” I think that this alone is what you can expect of the banks.
I think that the tendency in this climate is to be fearful. I believe that our role, to the extent that we can, is to offer guidance and be there to provide you with as much information as possible. I know that when all of these mergers have come up, internally we have tried to identify what this means to us. We also try to identify what it means to the client as well.
Alex: I think that it's the same at the regional bank level; it will be the same issues. You know, “You talked to me, you were there for me in the crisis, but you also took the time to make sure that you understood my industry. This is particularly hard when you get into the diversified sort of middle-market group, because there are so many variations of company business models that for a bank like mine to have a local understanding of a company and the regional market or regional economy we're both in and to not overreact at a macro level — this is difficult for a bank. I believe that SunTrust has the right operating model to do this well, but it is rare.
The other thing I would say is that I would hope that in two years banks, or at least SunTrust, would be looked at by their clients as having provided the information and the liquidity alternatives that were needed in the toughest of times. Internally, we are focused. We meet weekly to set pricing and portfolio options for our clients, but not long ago it was something that used to happen monthly. Now we have to interpret what is the right risk and reward option to offer the clients, and to get that word out fast. So when clients look back in a couple of years, I think it will be, “Did you give me what I needed to stay liquid? Did you provide me with the cost-benefit of that, and therefore help me to stay ahead of the liquidity curve?”