4 Aug 2016

Brexit - Impact on London Financial Centre

Merchants of doom are let loose by the result of the Out side winning the EU Referendum in the UK. All sorts of comments are made by objective and less objective parties. The surprise referendum result shocked quite a few and as the Remain side was expecting a win the resulting reaction was also emotionally charged. And many in the business and financial community favored staying in the EU. That our 'friends' on the other side of the Channel are fighting to get as much of the financial business as they can should surprise no one. One only wonders why they are so keen on activities that the political and cultural 'Elites' on the Continent seem to keen to despise in any case.

But how much business is going to move away from London?

The Brexit impact will be crucially dependent on the skill with with the Exit negotiations are handled by the British Officials. Pussy-footing around - trying to be Gentlemen and not offend anyone - will not work. Only steely determination will be able to overcome the multinational cacophony of statists their water carriers in the EU Institutions. Their mindset is a million miles away from the British/Anglo-Saxon preference of Liberty over State intervention at all possible moments.

A key point that the UK has to make is that special treatment for (Financial) Services will not be accepted. Any service like financial transactions cannot be approached the same way as trade in goods. The equivalent of blocking financial business would be the same as unilaterally blocking the import of, say, German cars. So British negotiators must be prepared to be tough with any attempts to give a one-sided advantage to the statist - and ideologically motivated - bureaucracy on the other side of the table. If the other side does not accept this then the UK should insist that BMW is only allowed to sell cars when they are actually manufactured in Britain.

The insistence on the 'Four Freedoms' should also be exposed at what it is: an ideologically motivated dogma that has no place in any discussion about Free Trade. Adam Smith did not pretend that free movement of people between England and Portugal was essential when he gave his famous example to demonstrate the benefit of Free Trade. 

A detailed analysis would pour cold water on the arguments of those expecting a rush to the exit.

Securities Dealing - long before the Continent left the dark ages of Absolutism London had a thriving market. 1700 saw already all the aspects of Buying, Selling and Issuing that we are familiar with these days. Investors in Frankfurt or Paris are able to deal in Tokyo, New York and there is no reason they would not be able to deal in London. Most largers banks have local operations that serve local clients and feed business to the hub in London.

Issuing Bonds and Equities, IPO's - the same argument applies

M+A - again, local operations will be perfectly able to be managed out of London, the alternativ? Set up the major hub in Frankfurt or Paris? Does not make any sense.

Corporated Banking - major clients, eg Siemens, Nestle etc will still use the advise given by the local branches or the hub in London, depending on where the client contact is closest or the human capital is located. Smaller clients will continue to rely on local banks in their home market or - in some cases - deal with the branches of major foreign banks.

Retail Banking - no effect from Brexit. Only a handful of EU nationals have accounts outside their home countries.

Asset Management - already most funds sold on the Continent are domiciled in Luxembourg or Dublin, even if they are managed out of London. Good Luck to those who think their careers require a move to Paris or Frankfurt. But beware, the grass is not always greener and a more parochial environment awaits you.

Will there be job losses in the financial industry? Yes, but this will be more due to some other factors than Brexit: 1) The trend to passive investing, pressure on fees 2) Introduction of more technology and (3) transfer of lower-skill roles to cheaper locations (for example the larger Swiss banks have for quite a while sent operations staff to countries like Poland).

Apart from the usual arguments favouring London as the major financial hub in Europe the rivalry between continental centres - esp Frankfurt and Paris - will make it unattractice for businesses to move to either of them as they both will find it hard to build critical mass that overpowers London.
If regulators and politics in London are putting measures in place to attract the overwhelming part of financial business from the 'rest of the World' (6 1/2 billion and rising vs, just 400+ million in the rest EU) London should have a very bright future indeed.

24 Jun 2016

Leave London? Cut your nose to spite your face!

Talk about major financial institutions leaving the City of London in the wake of the Brexit Vote do not throw a good light on the leadership (if one can call it that) of these firms. Most of them are already well represented in the other major financial centres in Europe. Coverage of local clients is handled by these branches and there is no reason to shift major resources to places like Madrid, Milan or Amsterdam, not even to Frankfurt or Paris (why would it be more efficient to cover France from Frankfurt if the major European hub is installed there?).

9 Jun 2016

Scared about Brexit? - Update

Following up on my post from earlier this year (see below) I want to reply to an important point made by those arguing against Brexit. It is the future of the UK's financial service business, in particular the role of London as the major industry hub in Europe.

Of course no one can predict what the regulatory and tax landscape would be in case of the UK voting to leave the EU.

But a point by point analysis demonstrates that Armageddon is not going to happen.

Retail Banking is - and will remain - a local business. Banks can and will continue to run local subsidiaries in relevant member states.

Wholesale Banking is unlikely to face major impediments. If a company in a member state gets a loan from a consortium organised by a banking team in London it should not face major problems.

Securities Dealing, Broking and Underwriting - the critical skill mass is in London, where would be the alternative, Frankfurt, Paris? The business might face problems, but they are more due to disintermediation by new technology rather than any possible fallout from Brexit.

Asset Management and Private Banking - many retail funds are domiciled in Luxembourg or Ireland, unless there is a specific prohibition of their management being based outside the EU not much would change.

Insurance - an exceedingly over regulated industry. But retail business is already locally managed and wholesale (mainly big-ticket and re-insurance) should not be overly burdened.

So any fear mongering about an imminent mass exodus to Paris or Frankfurt are way off the mark. And this does not take account that business with the 'rest' of the world (yes, there are about 6600 million people not subject to the unelected bureaucrats in Brussels!) should not change and might actually flourish in an environment not subject to dictats from the EU.

Post from 3 March 2016:

A lot of my recent conversations with clients and business friends inevitably end up with a more or less detailed discussion of the upcoming Brexit vote here in the UK.
As an 'Immigrant', albeit one from Central Europe and living in the UK for all my working life I can look at the issue from both the 'In' and 'Out' camp.
But whatever the outcome of the vote, nothing much will change for at least two years. Any departure from the EU will have to be negotiated over a lengthy period, and the implementation of any agreement could take up to ten years.

More important seems to me to be the question what the UK will really achieve by leaving the Union. No more excuses about interference from 'Brussels'. A look at a few topical problems that need an answer makes one sceptical:

Did the billions of compensation gifted to 'victims of PPI mis-selling' improve the standing of British Banks and the City of London as a financial centre?

Why is the discussion about an additional runway at Heathrow, or a completely new airport, dragging on for more than 40 years? (Remember Maplin in the Mid-70s?)

Why are doctors paid (bribed) to avoid making too many referrals to specialists? and no radical measures are taken to train more doctors?

Business is difficult enough so let's not be distracted by endless Brexit Talk.

Politicians and Regulators do their very 'best' to destroy - or at least impede - a smooth functioning of the economy, debts are piled upon debts and the poor saver is left with puny interest - if any - on his savings!
This is the challenge the Financial Service Industry is tasked to accept.

29 May 2016

End of Hedge Funds?

Gloom and Doom may work for Marc Faber but it should not overshadow rational analysis of the Hedge Fund Industry.
Performance comparison with the S&P means to compare apples with oranges. And there are many different strategies that all have to be looked at from a different angle.
Costs have - and continue to be - high and it is not clear why megafunds should be able to charge fees of up to - and in extreme cases more than - 2 percent and at the same time charge performance fees of around 20 percent, often without application of any reasonable hurdle rate.
What has to - and will - happen is that the structure of traditional asset management and hedge fund management will slowly get unified.
Exceptional managers may be able to receive higher fees, but even in the traditional asset management space there is a wide variety of fee levels that investors seem to be happy to accept.
Careful scrutiny will be the order of the day when looking for 'active' managers. The trend to passive investing may continue for a while longer, it will stabilise when the passive part of assets under management reaches the 60-70 percent range. Sharp competition for the remaining 40-30 percent of the asset management cake will lead to a compression of fees.
Performance fees - not only for hedge fund managers, but also for private equity and other alternative fund structures - are problematic in any case. For good reason US regulators placed severe restrictions on their use until the mid-1980s. The way they are structured gives too much of a one way option for the providers of asset management services.
It may be the end of hedge funds as we know it (Business Insider)

26 May 2016

Employee Evaluation - when Common Sense and Human Touch go AWOL

Numerical rankings were already an idea from hell. Trying to achieve precision - am I number 6 or number 7 on the Goldman Sachs list? - is impossible. Anyone convinced of the opposite please contact me - but provide clear examples, not MBA speak that some cloned professor has published in some obscure magazine no one ever reads.
Is the new scheme - a web-based tool to give and receive performance feedback at any time - going to be a change for the better?
I have (serious) doubts. In an organisation where the motto at the top management level is 'Greed is Good' and the only personnel management tool seems to be the doctrine to weed out the 'weakest' 5 percent of the workforce in any given year the human touch and common sense approach is long gone from the organisation.
Does one have to wonder that performance and return for shareholders have been mediocre since the old partnership was killed off (by those keen to cash out at the expense of those following in their footsteps)?

DIY Pensions -like DIY Brain Surgery

The idea that the average person should be wholly/predominately responsible to save for his/her retirement is laughable. It may appeal to doctrinaire free market advocates and it certainly appeals to the providers of the many 'products' that are supposed to provide for a care-free retirement.
But much better for the state to provide a sufficient pension. Longevity and investment risks are truly shared, between all citizens and all generations. Costs are very low - no pass the parcel investment games, no expensive admin (everyone gets the same pension, higher rate taxpayers give back more than those in a low tax bracket or not liable to any income tax). This is to some extent akin to the currently debated 'Guaranteed basic income', but only applied to those already retired.

Anyone who has tried to manage his own investment portfolio will understand how difficult investing is. Even so-called professionals time and again mess up, highly acclaimed 'Masters of the Universe' in the Hedge Fund industry often produce lamentable investment returns. So pushing the masses into the investment game means they are supposed to do the equivalent of Brain Surgery on themselves.

By all means encourage people to save, but this part of their retirement provision should not benefit from overly generous tax benefits (that mostly flow to those already enjoying high incomes) and also be free from all other regulatory and bureaucratic restrictions. These additional nest-eggs can help to provide a more comfortable old age than the universal state pension will be able to provide.

48% of Americans saving for retirement are pretty sure they have no idea what they are doing (Business Insider)

Report on the Economic Well-Being of U.S. Households in 2015
(Federal Reserve)

BHS Pension Fund Debacle

Yesterday's headline read Green 'missed five chances to save BHS pension fund.' But the article missed the possibility that Philip Green and his (well rewarded advisers) were more than happy to 'miss' these opportunities.
They were on the inside and had all the information about the state of affairs at BHS as well as the pension fund.
It could well have been the case that all the 'opportunities' available to extricate Green from BHS would have been more expensive and therefore unattractive.
The fact that the Green camp was advised of the track record of the eventual 'buyer' shows that they can not claim to have been in any way duped or surprised about the eventual outcome.
What is really astounding is the way the pension regulator and the trustees of the pension fund behaved. It can only be described as inept (the most charitable description), in the good old tradition of just trying to be nice to everybody, we are all from the same schools, go to the same clubs and attend the same (free) hospitality at sports and entertainment events....reminds me of a former Chairman of British Airways (it may have been before BEA and BOAC combined) who climbed into the cockpit during a flight and asked the captain 'What model of airplane is this?'. Enough said, British management has improved since those days, but not in the party and state dominated 'public' sector.

20 May 2016

Deutsche Bank - enough own goals to win any competition

It will be interesting to see how much longer the chairman of Deutsche Bank's Supervisory Board will be able to cling to his seat. The number of own goals at DB is growing remorselessly, the person at the top of the management pyramid must certainly take a lot of the blame. Having worked at Goldman Sachs used to be a badge of quality, but that was a long time ago. Nothing but a 'Grab as much as you can' Culture has survived the IPO and Paul Achleitner's handling of affairs at Allianz Insurance was also not exactly crowned by success (Dresdner Kleinwort may ring a bell).

13 May 2016

Commodity Trading - A Mystery

While this news item illustrates the extraordinary influence the - mostly Switzerland-based - Commodity Trading firms have in the markets the real mystery is the profitability of their business model. Given the nature of the business most transactions - if not all - are conducted with counter parties outside of Switzerland. That leads to the questions where trades are booked and taxes are paid. Do the Swiss really care, do the authorities in Geneva and Zug have the resources to police all transactions? Or are they happy with the taxes they receive, following the motto that something is better than nothing. The trading firms could leave at a drop of a hat and decamp to friendlier climes (Dubai? Cayman?) if tax officials are becoming too nosey. And how are these wondrous profits achieved? Most deals are over-the-counter, in physicals. Counter parties are often little-supervised and basically unregulated entities in places that rank very low on the transparency side. Has any of the numerous regulators that harass the financial industry ever shown interest to have a close look at the commodity trading universe? Not to forget the media that could also stop writing fawning pieces on the 'success' that the trading firms have and the fabulous wealth their senior executives enjoy.

1 May 2016

Credit Suisse CEO without Banking Experience

Can it make any sense to appoint someone to lead a bank when the person has no specific experience in the industry? Recent moves by regulators tended to make it mandatory that senior staff has relevant qualification and experience, so what banking experience does Credit Suisse CEO Thiam have? Sad to see a once-stellar franchise being managed so abysmally! Being well-connected in the higher echelons of politics in Senegal or Ivory Coast should not be a free pass to top management.