Northern Chill

Northern Chill

BANKING by Jean Gruss | Editor/Lee-Collier

The chairman and chief executive officer of Northern Trust tells a tale of two economies. Real estate is dragging Florida into recession but global growth is strong.

The man who leads one of the country's largest wealth management firms doesn't mince words when it comes to assessing the current state of Florida's economy.

"I think Florida's in a recession right now," says William Osborn. The blunt chairman and chief executive officer of Northern Trust, which has $4.1 trillion in assets under custody, says the rest of the country may not be far behind.

"It would not surprise me if we went into a modest recession" nationally, Osborn told the Forum Club of Southwest Florida, a group of mostly retired executives in Naples. "There's no question we're going to be in an overly low-growth period in the next six to nine months."

The Review caught up with Osborn after the luncheon (see related question-and-answer session).

Osborn blames the downturn on the credit crunch and the housing slowdown. "The message is: We're going through a tough period and it'll take a little while to work through," Osborn says.

In particular, the subprime-lending debacle hasn't yet reached a conclusion in part because no one truly knows the extent of the problems associated with bonds backed by mortgages.

"Trying to find the real valuation of these securities will be difficult," Osborn says. "The subprime will take at least a year to work through."

A recent proposal by major banks and U.S. Secretary of the Treasury Henry Paulson to create a superfund that would buy mortgage-backed bonds would delay efforts to determine how much these securities are really worth. "I'm concerned it's an artificial mechanism," Osborn says. "You may be better off letting assets find their values."

In the meantime, the credit market turmoil will affect financial institutions around the globe. "The pain will be distributed out among many different places," Osborn says. "This is a very troubling time in the financial services industry right now."

For its part, Northern Trust has largely escaped the turmoil because it has stayed out of areas such as investment banking and mortgage lending. It also has benefited from growth overseas in the business of managing money for wealthy individuals and institutions. The company's stock recently was up nearly 20% so far this year (symbol NTRS; recent price $80).

"Companies doing well today have globalized," Osborn says. "Institutions need to think globally to grow."

Still, Osborn says he's optimistic that the U.S. economy will emerge stronger after the housing and mortgage problems are resolved. "You'll feel better on the other side of this one," he pledged.

REVIEW SUMMARY

Industry: Banking

Company: Northern Trust

Key: It will take several years for the real estate market to rebound.

Q&A with William Osborn,

Northern Trust Chairman and Chief Executive Officer

Q: Why do you think Florida is in recession now?

A: I think Florida has some challenges that relate to the cost of living here. Now you have a housing decline. You have a building industry that's going to be shrinking. And you have - because of insurance requirements - some out-migration, people moving up to Tennessee, Arkansas, Georgia, South Carolina, North Carolina. Florida in the long run will be fine, but I think it's going to go a tough period.

Q: Real estate is on everybody's mind in Southwest Florida. Can you give us any insight on when a recovery might occur?

A: I would say the market in the mid- and low-end is pretty troublesome right now. In the high end, there's always somebody who wants in if it's a place on the water. So as I look at it, that market will take probably several years to work through.

Q: Your counterpart at Wells Fargo said recently the housing market was the worst since the Great Depression. Do you agree?

A: Well, he's got a better view of it than I do. But it is clearly challenging.

Q: Is the slump in the credit markets likely to force banks to cut lending and could that lead to a national recession?

A: I don't know enough to comment, but I'll say that I think we are at a point where a recession is very possible and people shouldn't be surprised if we go there.

Q: What is your strategy in Florida in light of these prospects?

A: My personal view is that Florida is a wonderful state. The demographics - the aging of the Baby Boomers, people like me - are going to be retiring and want to have a place in Florida. That will drive an awful lot of growth over time. So I don't think the in-migration into Florida is going to change. Florida's got some issues to work through, but in the long run it's going to be fine.

Q: What are you advising your clients to do in this volatile environment?

A: What I've said to some of our clients who have asked me here is that you can't time things in the market. So what they need to do is look at their asset allocation, verify that's where they want to be and if they're a little concerned maybe move a little bit more short term to cash. But by and large if they're looking long term they'll be fine.

Q: How has Northern Trust avoided the pitfalls of the housing and credit crises?

A: Our focus is not as a traditional bank. We have been focused as an organization on asset servicing, asset management - what we call the private bank and fiduciary requirements. So our business focus does not take us into the higher risk areas that some of the other financial institutions are in. We don't do investment banking. We don't do the things that were parts of what has been challenging in the markets.

Q: Has your exposure overseas insulated Northern Trust?

A: There's higher growth. What it's allowed us to do is to take our normal growth in the U.S. and compound our overall growth. Our global custody assets have been growing at a compound growth rate over the last 15 years at over 30%.

Q: How much consolidation can we expect in your industry in light of the recent turmoil?

A: I'm not worried about Northern Trust. But I think you could see some of the others in the traditional banking business end up consolidating. But I don't think it's going to happen real quickly because I think everyone wants to see what kind of assets are really there. Are some of them troubled assets? You need to see that transparency of quality. Once you know what it is, you'll probably see some movement.

-Jean Gruss